A Modest Proposal for Ending Socialized Capitalism
Socialized capitalism of the sort the Fed and the Treasury are now practicing, consisting of private gains and public losses, is untenable. On the other hand, it's also true that giant Wall Street investments banks as well as Fannie Mae and Freddie Mac are too big to fail. How to reconcile these conflicting principles?
Here's a modest proposal: When taxpayers insure a giant entity against loss -- as we now are with Freddie, Fannie, and Wall Street investment banks -- those entities must agree that:
(1) for the duration of the bailout, their top executives cannot receive total annual compensation higher than that received by the President of the United States, and
(2) the government gets five percent of their current valuation as shares of stock (roughly representing the benefit to their shareholders of the federal insurance) -- so that if and when the entities become profitable again, taxpayers are compensated for the risk they've taken on.
Here's a modest proposal: When taxpayers insure a giant entity against loss -- as we now are with Freddie, Fannie, and Wall Street investment banks -- those entities must agree that:
(1) for the duration of the bailout, their top executives cannot receive total annual compensation higher than that received by the President of the United States, and
(2) the government gets five percent of their current valuation as shares of stock (roughly representing the benefit to their shareholders of the federal insurance) -- so that if and when the entities become profitable again, taxpayers are compensated for the risk they've taken on.
posted by Robert Reich | 3:50 PM
68 Comments:
Would this be a capital gains payment that Freddie and Fannie would be making? Sounds good.
But, more than simply not get paid extra in the time ahead, couldn't we sue the CIO, CFO COO etc of these corps for their outrageiously large salaries for the last 5 years while the run up to this debacle was taking place?
Why doesn’t the U.S. government just buy equity in these companies? This cash could save the company. It would also sooth investors in a big way. The U.S. could then sell them back once the share price rises at a gain. In essence, the U.S. could be a mutual fund at times.
Mr. Reich,
How about we strike at the root of the problem and abandon the fantasy, long held by Democrats, that every American is entitled to own a single family home (nay, a luxury home) no matter what sort of government led market perversions (like Fannie and Freddie) are needed in order to promote the illusion that people really can live WAY beyond their means without suffering any consequences?
If the discipline of market forces is reintroduced into the housing and lending sectors, we will see FAR fewer problems down the road.
Dr. Balassi,
Why on EARTH would ANYBODY want government bureaucrats investing our money?
Are not the dismal returns from our Social Security “investments” proof enough of THAT folly?
I would NEVER want to set that precedent (which would only expand from that point).
You know, I've often wondered why the government doesn't include these types of conditions for companies that it bails out? Why are we giving them free money without any restrictions as to what they can do with it? Seems to be common sense that if you need a taxpayer bailout then you need to trim the fat and cut your executive's pay. I guess this is all part of the private gains/socialized losses that you alluded to earlier.
Perhaps some we need some pre-trustbusting laws that limit the size of mortgage lenders or banks. That would increase the number of lenders, increase the competition to get customers, and the failure of any one lender would not have the huge effect on the economy that Fannie Mae and Freddie Mac would.
One problem I see with that plan is the lenders might offer loan terms that were “too good” (subprime, any one?). But then those lenders must be allowed to fail. Tough love.
But please: no more bailouts! “This is the last bailout. We swear!” I’m sure the Fed said they last time… and they’ll say that next time, too.
I grin when I remember Mitt Romney's father stated that 225 was adequate compensation for a CEO. Republicans must crank up Rush Limbaugh to drown out the memory.
Nancy Pelosi wants a second stimulus package. Interesting, because a poll showed today the effect from the first stimulus is over. In Disinformation: The Little Earth Book, James Bruges has a section titled "there is no shortage of money or food in the world." Of course it was written a couple of years ago. I like the idea of every abandoned home and its yard being turned into a community garden; let people walk the tend them. Might give agribusiness fits with their seed patents, but a Peace Corps type service right here in the US might be useful. The Sunday NY Times reported slice of farm ownership has increased.
Sir, you don't get it.
Accountability is for little people.
As Phil "let them eat cake" Gramm said: "quit whining and accept your place". Or something like that. :-)
Mr. Reich, you must be reading my mind. I totally agree that the CEO's should not make more money than the President of the US. I personally think that if the government is providing the bailout, then the government ought takeover freddie and fannie and use the profits to support universal health coverage. Too many people lose everything, including their mortgage, because of healthcare bills.
Great proposal. I am with you completely. The bigger problem may be deciding which institutions are important enough to bail out (Fannie and Freddie are rather uncontroversial choices) and which ones should be allowed to fail. Even with a piece of any future earnings, saving some banks may be too much risk for too little value.
Hey, as long as everyone's still eating, then it might be good for our character to have all our wealth wiped out. We can re-learn how to distinguish need from "need"
Just watched you in Century of the Self, Dr. Reich. I love the part about women not using Betty Crocker instant cake mix because they felt overwhelmingly guilty about how easy it was. So just because of that Betty Crocker made it harder to make instant cake -- make women add an egg and all of a sudden they use it in droves! Madness
I'm telling you, all our problems could be solved if we just reverted back to our old MO that we built everything on -- unapologetically keep the land we conquer (and its oil). Somewhere along the line frontier expansion morphed into economic expansion, and we lost our clarity. At one time, sbvor, it must've been true that everyone was destined to have their own plot of land, but now who knows
Why don't anti-trust laws prevent companies from becoming so large that their failure emperils the economy enough to require a bailout?
Terrific proposals, Dr. Reich. After the revolution, we'll also have to remember to include all consultants in that point (I) salary ceiling. Once any fed bailout becomes imminent, you know that top execs will get around the rule by leaving the company to consult it.
Sbvor I love the way that you blame every policy championed and pushed through by Republicans, on liberals.
From the way you tell it, liberals have had complete and total control of our country for decades.
So I have to wonder, since you think all of the current Republicans are left leaning liberals, what do you think is moderate or right wing?
I don't see these actions as meaningful Robert. CEOs can just retire with Golden Parachutes, then act as contractors to skirt this law.
The government would just later sell them back their stock at firesale prices.
Only radical legislation that rationally regulates the industry and actual prosecution and imprisonment for crimes will have any impact.
But we need to completely crash before we can get a new legislature that would do anything meaningful at all. This situation must run it's course. As the last few legislative turnovers have just given us new batches of corporate concubines, all we can expect for now is more of the same.
Until our legislature cares more about our nation's citizenry, than standing in line for huge corporate bribes, our situation will only worsen.
I don't see how this will turn around anytime soon. The left leaning extreme right wing liberal Republicans during the Clinton era legalized bribery, and I don't see how we can get all of these leftist liberal right wing Republicans to give it up.
No. Their top executives cannot receive total annual compensation higher than the lowest-paid employee in their company.
beerzie is on the right track.
All management should receive salaries based on a multiple of the median income of the companies workers. Maybe 5 times the median. If they think they're doing a great job, let them go out on the open market and buy their companies stock.
This shouldn't be just for government take-overs, it should be for all companies, and all government employees, all the time. In fact, government compensation should be based on the median income of Americans. You want a raise? do a good job for everyone!
Toast:
Drinking again?
Don't know that I see government employees as quite the same degree of problem as CEO/exec pay. Maybe we should focus on one thing at a time?
sbvor:
If the discipline of market forces is reintroduced into the housing and lending sectors, we will see FAR fewer problems down the road.
Do you live on this planet or are you posting from Mars?
Even if you are posting from Mars your posts do nothing to prove intelligent life exists on Mars.
Robert said...
"Socialized capitalism of the sort the Fed and the Treasury are now practicing, consisting of private gains and public losses, is untenable. On the other hand, it's also true that giant Wall Street investments banks as well as Fannie Mae and Freddie Mac are too big to fail. How to reconcile these conflicting principles?"
The current dynamic of Fannie and Freddie should be completely abolished. No more pretending that they’re private companies. Nationalize them and remove any doubt about their status and restore their original mission of facilitating home ownership for a broader spectrum of people. This can be done far more effectively without Wall Street and its pathological obsessions.
Fannie was nationalized for several decades and the U.S. didn't get swallowed up into the earth and Trotsky didn't become a household word. lol
Anyone who enjoys reading Dr. Reich's posts should see the BBC movie he's in called Century of the Self.
It's on youtube (though of course broken up into 10 minute increments). He has quite a few minutes in it (some of the clearest analysis too), though I can't remember which parts off hand
Great movie about the runaway desires that feed capitalism -- desires that have been manipulated in surprising and unsurprising ways for the last 60-70 years
A fantastic proposal.
Why should taxpayers assume the risk but not reap the rewards when the company stocks rebound? And why should CEO's make over a million a year in bonuses when they have mismanaged their companies?
I just can't believe that you need to shell out tens or hundreds of millions of dollars to attract good CEO talent, or keep it
There are plenty of smart and hungry state school grads and others who could be groomed and could eventually perform just as well, and who wouldn't expect so much.
Art:
"Drinking again?"
What do you mean "again"?
If we're going to do it, let's do it right. Why do we have to wait for a crises to figure this out, it AIN'T rocket science. CEO's are way overpaid, and so are most government employees (I worked in government for many years).
We've bailed out too many ceo's, too many have driven their companies into bankruptcy while laughing all the way to the bank, and as brooklyn said there are too many people just as qualified that can and would do the job for a lot less. Time to put a cap (linked to employee pay) on these crooks.
brooklyn:
The underlying issue is that the "fraternity", CEOs and Board members, perpetuate the idea that these CEOs are superstars, maybe better X-men, who have powers beyond those of mortal men and when exercised, those powers can achieve successes that only a few are capable of.
That view becomes ubiquitous because no one ever watches them get dressed in the morning and sees that they put their pants on one leg at a time.
Toast:
Sorry; still!
Hey, I'm in your camp, brooklyn's too, big time, about CEOs. While there may be issues with government workers I don't see it as nearly as egregious so I would prefer to focus on CEO pay first.
I completely agree with tying all executive pay through some algorithm to employee pay.
The real irony, especially now with signing bonuses for CEOs, is that these guys take their jobs with a contractual agreement that, through base pay, bonuses, perks and severence clauses, provides no real incentive to do an outstanding job. They can take the job, fail and walk away with millions. Even better, they often get lots of stock and they can hold onto it until their successors have driven up stock prices and then cash in. The only real factor that provides some companies seeming success from their CEO choices is the CEO's ego. Their personal desire to excel motivates far beyond any amount of pay.
Though it doesn't approach the problem of base pays, I refer to a previous post I made:
What the hell ever happened to the idea, still practiced with those below the executive suite, that here's your job, here's your pay, and I expect from you, for that pay, to produce the best results of which you are capable. Those results are what I am paying you for and there will be no additional pay for just doing what I paid you for in the first place?
Why don't we outsource CEOs to India.
Then they wouldn't have to be paid more than $50k / year.
Art is right about CEO pay (though I'm not sure it is fair to call them crooks). It is a self fulfilling prophecy at this point. They've been bid up and now a competitive salary for a large entity is a seven figure base, which is theoretically only around 10% of all-in compensation. In other words, the bonus and equity component of CEO pay packages (and I'm using rough averages here) are supposed to make up 90% of total annual compensation after the CEO has crested the firm's equity vesting period (usually somewhere around the three year mark). This means that your average big company CEO has a total compensation target of $10mm. That value is supposed to ratchet up in good years and then come down in bad years, but it's a lot of money any way you slice it.
Now, whether or not these CEOs are worth this amount of money is somehting we can debate until the cows come home. My personal opinion is that some probably are and that the amount of value(for shareholders, employees, the communities in which they operate, etc.) that they've helped create well justifies the compensation they've received. Unfortunately, many are not worth that money.
The thing that I think is difficult is figuring out who the really good ones will be. I don't think boards of directors purposely hire someone who they think is going to do a poor job and the folks who come up the ranks (or were CEOs at another company) and achieve the CEO titles have, for the most part, been highly succesful to that point. So, they don't think they're going to fail either. This situation becomes a salary negotiation conundrum because the new person says, "I am going to be a succesful CEO and succesful CEOs make X. That is the market rate and that is what I expect you to pay me." The board says, "You're right. That is the market rate. We want a leading, succesful CEO. That is what we will pay you." This applies equally to the prenegotiated golden parachutes, which are standard parts of these contracts (again, not saying whether this is right or wrong).
I think we all have to be honest with ourselves here as well. Would any of us behave any differently in a salary negotiation?
I recognize that we all place different values on different aspects of our lives. Some are willing to forgo some salary in exchange for more time off. Some might be willing to accept less salary because their personal passions align with the goals of the organizatio they are joining. These are all personal decisions that we make and, since I'm a live and let live guy, as long as it works for you, it works for me.
Now, let's say that you're considering two opportunities where everything along the personal value dimensions are equal except pay. Wouldn't any rational person take the money? I would suggest that this is no different than the decision that CEO candidate is making and explains why we're not likely to see CEO compensation coming down anytime soon.
Now, as for Freddy/Fannie, I like the idea advanced by Bill Ackerman on MSNBC yesterday. The government intervenes and works to recapitalize the firms by lowering the senior debt by 10% and giving senior debt holders that 10% in the form of equity (stock). This would wash out the existing equity holders, but that is one of the risks of owning equity (and this from a finance guy who is loathe to hurt the shareholder). The government would guarantee liquidity in the stock by agreeing to buy that equity at cost for a period of three years, after which time that put would expire. The shareholder bears the burden of the bailout and the government has the opportunity to profit if the stock price goes up from what ever it gets issued at as part of the recap. The government could lose on that put too, but the downside is reasonably low because it is a safe bet that not all new equity holders would exercise the put.
I think we also have to be fair and acknowlege that Freddie and Fannie have, for the most part, created a lot of value (despite the accounting nonsense and other management shenanigans of the recent past). They only securitize conforming debt, which is that debt which meets the most stringent underwriting criteria. There is no sub-prime in their portfolios and any devaluation is driven more by sub-prime contagion and the deflating of an asset bubble than anything they've specifically done. Nobody--I repeat, NOBODY--was complaining when FNM went from around $16 in 1995 to around $65 just a few months ago. Yet, we're all piling on now as if they created 100% of the mess that they are in. I'm not saying they've done everything right along the way, but let's at least recognize the situation.
Robert Reich is correct to say that Fannie/Freddit are too big to fail. I don't want to imagine the economic disaster that would happen if they did.
anonymous matt
I still think the only way to correct any of this is not through legislation or board actions (since Congress and most directors are in this "fraternity") -- but just through a massive boycott of shit we don't need. Problem is people are animals and animals can rarely choose to deny themselves creature comforts (all these wonderful goods that make us so happy!). I urge you to watch Centruy of the Self to see just how deep this problem is, and to watch Dr. Reich in action. I watched it yesterday and I'm still dwelling on it.
sbvor keeps whining about letting the market solve all this. I agree with you Art that the root of this problem is that the whole system is gamed by an exclusive bunch that have not proven their worth in the market, but have just been plopped on top and in charge of it.
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WeaselDog,
The root of the problem is two more Socialist housing programs created and promoted by Dims.
Quoting the about page for Fannie Mae:
“Fannie Mae was created in 1938, under President Franklin D. Roosevelt”
In 1938, the 75th Congress was overwhelmingly dominated by (Socialist) Dims in both houses.
Quoting the about page for Freddie Mac:
“Freddie Mac, one of America's biggest buyers of home mortgages, is a stockholder-owned corporation chartered by Congress in 1970”
In 1970, the 91st Congress was dominated by (Socialist) Dims in both houses.
The top executives at both of these atrocities are prominent Dims.
Matt:
Welcome back!
I don't think I ever referred to CEOs as "crooks", although if the shoe fits. There certainly have been those who directed we compliant finance types to practice the "art" of accounting as opposed to the "science" of it. Unfortunately, most of the "science" ends with debits on the left, credits on the right.
One can hardly disagree that if offered outlandish salaries only a fool would decline.
At the heart of the issue, at its inception, was that since Boards are generally made up of other CEOs, active or retired, there existed a fraternity made up of like-minded/goaled players. I'm not suggesting a conspiracy but given the commonality of interests the weed began to grow and cross pollinate.
No doubt it is a systemic problem that arose from a systematic confluence of variables. Looking around at celebrities making 10's of millions per project or year and comparing their contributions and work efforts versus the pressures and variables that a CEO must juggle, it's hard to argue that CEOs should not be paid commensurately. At the same time, entertainment celebrities are subject to the vagaries of their popularity along with the projects they choose. Sports celebrities can be measured by personal achievements mitigated somewhat by team achievements. Both of these kinds of celebrities are also significantly limited by age rendering their exorbitant salary days limited. CEOs are not restricted to a brief period of years to make hay.
A further disconnect is that CEOs do not accomplish feats alone, in a vaccuum. This is true to a limited extent for the other celebrities but a much more important factor with CEOs. Depending on the circumstances, they may bring in their own operating team and you might give them some kudos for personnel selection if the team is successful. Even with staffs of their choice they still rely heavily on the core of management and workers that were there when they came for product, operations, distribution and marketing expertise. Few in that lower echelon participate significantly in the monetary rewards of future successes.
Granted numerous variables are at play: Does the new CEO/team have specific industry experience? Do they have specific product knowledge? If from within the industry the learning curve is shortened. If coming from a market leader in the industry they come complete with ideas from experience that worked for their previous employer, giving them a leg up on promising changes or improvements. Of course differing cultures can confound change.
If from outside the industry with a modicum of market familiarity their learning task is much greater and their reliance on the core is much greater. Their ideas for change and improvements will often be predicated on the views of long time employees and determining which ones they will rely on can be critical.
I could go on and on but in net, CEOs achieve by marshalling resources, most of which were there when they came. Some have personal skills that set them above and they deliver driven by those skills. Many just rearrange the office chairs and pick and choose the new braintrust from existing personnel. Often, depending on the company's previous performance and the potential for profitability without a complete makeover, what we see is nothing more than the Hawthorne effect. Change, any change, refreshs outlooks and everything becomes easier to accomplish.
One other major influence in this sphere of absurdity is the view of Wall Street to the selection. Wall Street is wowed by celebrity and big pay. XYZ Corp could hire a phenomenal CEO candidate, with lots of promise, but if he receives a pittance for a pay package Wall Street will hammer the stock or at least will hold it in abeyance until they see results. If given an exhorbitant pay package Wall Street will be much more inclined to jump on the bandwagon and promote the stock for surely the Board wouldn't pay this much for a failure.
My favorites in this venue are the turnaround specialists. Those who take on failed or bankrupt companies not faltering ones. These guys are worth their salt and generally don't get much unless they are successful. Their task is horrendous and they will have worked their tails off if they achieve. If they fail they don't get a whole lot.
I do agree that since we are now there I don't see an easy way of reversing the trend. Shareholder input to executive salaries is folly. Limits to tax deductibility of excess earnings has been tried but to no avail. Maybe a punitive progressive rate structure would help but likely only temporarily until workarounds can be figured out (could bode well for finance tax guys). Once we're in the briar patch, unless we are rabbits, getting out is difficult and painful.
sbvor:
Isn't it time to change your diaper? Maybe a nap? At your age a little exercise would be good. Why don't you go on a 200 mile walk?
At this rate your only claim to good health will be strong fingers.
Mental exercises would also be a good idea but I'm not convinced that there is any hope for you mentally.
Dr. Reich,
Good to see you come up with some concrete solutions to economic problem situations you describe so well.
As we all know, Fannie and Freddie have been indirectly supported in past years by the Fed in form of an implicit guarantee of their mortgage loans -- that the government would rescue them if real troubles emerged -- thus enabling both firms to borrow more cheaply than competitors and to make loans more cheaply.
In this way, they became highly leveraged giants in mortgage loans and buying home loans from banks and repackaging them for sale to investors. I believe their combined debts today are $1.5 trillion with an equity capital of only $82 billion, for a 94.5% leveraged position on $6 trillion in loans!
They are too BIG to FAIL ... indeed, that is why the Fed should share in the upside from their plan to give Fannie and Freddie access to Fed's so-called "discount
lending window" as well as Fed plans to have the power to inject billions of dollars through investments and loans. The goal must be to insure that Fannie and Freddie remain solvent as their failure could endanger the entire global financial system.
Bravo for stepping foreward with some fair return sharing for the taxpayers who are the ultimate 'funders' of the Fed's financial support.
Obscenely high executive salaries are a general phenomena in America. Couldn't agree more on your recommendation to set a low salary ceiling on F&F top executives... performance first, then all the avaricious rewards. I recall the former President of Unilever saying on TV that his salary was one-fifth of his counterpart at General Foods ... and the Unilever executive felt he still didn't entirely deserve his salary!
Frank Thomas, The Netherlands
Art:
What do you mean? There are no one-legged entries allowed where you work? :-)
Let me see if I can recreate, "Hey, I think we've got too much warranty reserve. It feels like about $25mm too much." And what a freaking coincidence...$25mm rounds to the two pennies we are short of consensus. Committing career suicide by not doing it. Been there.
Not sure I agree with you on the window of opportunity, though. I think the good ones have lots of years of opportunity. I think the bad ones who get ousted are largely unemployable afterwards. Of course, it could be that they're just not looking for jobs/listening to offers because the package was so good that working is no longer something they need to do.
You're right about CEOs not doing it alone and that, by and large, they do work with what's there. I think we would both agree, though, that some are better at it than others. Take HP for example. Carly's strategy wasn't wrong, the problem was operational execution. Mark Hurd has been masterful in that respect. Hurd did institute layoffs, but I'd bet they've hired a lot of people back (and are maybe net up) given their very strong revenue growth over the last few years.
The problem, ultimately, is that for every Mark Hurd or Bill Zollars, you get one who is mediocre and another who is a disaster...the kind of guys who come in and say things like, "the problem is that we don't keep enough inventory. So, we're going to amp that up and the sales will come." Sales, of course being demand rather than supply driven, don't materialize (you know, except for in certain cornfields in Iowa) and you end up going all Crazy Eddie, taking inventory write downs, etc. (Been there too.)
I personally don't have a problem with what many term excess CEO pay when that CEO adds a ton of value through their ability to get everyone moving in the same direction and strongly executing or through some strategy shift (and subseqent strong marshalling). I've had the pleasure of working for a couple really good ones and never once observed anything but a lot of intelligence, hard work, experience-based wisdom, and a strong sense of ethics and fair play. I've worked for one that I consider mediocre and another that I consider poor. The mediocre guy lived in the middle and did take a lot of heat from the board. The bad one lined the board with his cronies, spent a lot of time throwing people under the bus and made sure to get big raises every year while we in the finance department were holding the budgeted payroll increase to 2%. I don't miss working for him.
I diasgree with many on this board who would impose wage/price controls because history has shown them not to work (70's gas lines, anybody?) and you know how I feel about progressive taxes (we've debated that in the past). I actually kind of like the idea that I may someday have the opportunity to develop into a CEO and that I could enjoy the compensation I receive (I'll admit to being a greedy bastard). Of course, I fully expect to be great at it, which will certainly justify my negotiated package!
Did you see/hear Ackerman on MSNBC? I thought his idea was pretty good. Interested in your thoughts.
Gotta go find $40mm of working capital now.
AM
It’s always amusing to see how Dims react when confronted with the facts!
brooklyn:
Can't totally disagree with your boycott idea but it has weaknesses.
Back in the nineties when the internet was just blossoming I thought, wow, what a great tool to establish a consumer network that could be notified of this dastardly corporation or that one and boycotts could be initiated to bring the culprits back in line.
Now there is no doubt boycotts can work, if massive enough, but if you follow the bouncing ball you see that usually the first reaction to a significant slowdown in sales, boycott driven or other, is to layoff workers until management can decide a response.
At this point I am not enough of a revolutionary to want to punish innocents to achieve social goals. To do that or even think that way would make me a Conservative Republican and I'd rather be waterboarded than live with that event.
Here's a better solution-
" Rather than bailing out bankrupt banks and sending them on their merry way, the Federal Deposit Insurance Corporation (FDIC) needs to take a close look at the banks’ books and put any banks found to be insolvent into receivership. The FDIC (unlike the Federal Reserve) is actually a federal agency, and it has the option of taking a bank’s stock in return for bailing it out, effectively nationalizing it. This is done in Europe with bankrupt banks, and it was done in the United States with Continental Illinois, the country’s fourth largest bank, when it went bankrupt in the 1990s.
A system of truly “national” banks could issue “the full faith and credit of the United States” for public purposes, including funding infrastructure, sustainable energy development and health care.13 Publicly-issued credit could also be used to relieve the subprime crisis. Local governments could use it to buy up mortgages in default, compensating the MBS investors and freeing the real estate for public disposal. The properties could then be rented back to their occupants at reasonable rates, leaving people in their homes without the windfall of acquiring a house without paying for it. A program of lease-purchase might also be instituted. The proceeds would be applied toward repaying the credit advanced to buy the mortgages, balancing the money supply and preventing inflation.
Local and Private Solutions
While we are waiting for the federal government to act, there are also private and local possibilities for relieving the subprime crisis. Chris Cook is a British strategic market consultant and the former Compliance Director for the International Petroleum Exchange. He recommends getting all the parties to settle by forming a pool constituted as an LLC (limited liability company), in a partnership framework that brings together occupiers and financiers as co-owners under a neutral custodian. The original owners would pay an affordable rental, and the resulting pool of rentals would be “unitized” (divided into unit interests, similar to a REIT or real estate investment trust). Among other advantages over the usual mortgage-backed security, there would be no loans at interest, since the property would be owned outright by the LLC. Eliminating interest substantially reduces costs. The former owners would be able to occupy the property at an affordable rental, with the option to buy an equity stake in it. For the banks, the advantage would be that they would be able to find investors again, since the risk would have been taken out of the investment by insuring full occupancy at affordable rates; and for the investors, the advantage would be a secure investment with a dependable return."
Found at:
http://www.webofdebt.com/articles/bracing-storm.php
If Fannie & Freddie are truly in trouble, the better solution would be for the Fed to engineer a Bear Stearns like deal where Fannie & Freddie are finally fully privatized and any explicit or implicit guarantees of government backing are eliminated.
Remember, the Fed did NOT “bail out” Bear Stearns. The Fed merely backed the loan which allowed Bear Stearns to be bought out at a bargain basement price. In that deal, market discipline was enforced and shareholders in Bear Stearns paid the price for incompetent management. That’s a tough break for the Bear Stearns share holders. But, anytime market discipline is not enforced, things get a whole lot worse for many more people. And, if the new owners prove to be more competent, the Bear Stearns share holders may yet recoup their losses.
The root of the problem with Fannie & Freddie is the market distortions which inevitably result when government meddles in private markets.
To Republicans, it is only fair to socialize losses, not profits. Profits must be privatized.
Government to them is only another way to make a buck, after all.
SBvor blaming dems from the turn of the last century for today's mess is a bit like blaming Henry Ford for an automobile wreck you might see on the road today.
The liberals that have completed controlled our government for the last 16 years, while pushing a neocon corporate agenda, dismantled every regulation they could.
Without rules, markets become jungles. Ultimately they evolve into mob rule where corporations wage war with each other. Fortunately, for us, they use third world countries for these battle grounds at the moment.
You can argue that FDR possessed Greenspan's and Bernanke's bodies and forced them to become liberals that believe in unregulated banking and getting rich by destroying America, but I don't believe you.
I know you believe the current crop fo Republicans are slaves to FDR's will as he extends his grasp beyond the grave, but I don't buy it.
Do you have a different theory that shows that
Republicans are not responsible for their actions and scapegoats someone living, perhaps?
Matt:
What do you mean? There are no one-legged entries allowed where you work? :-)
Oh yea, we had em. I tend to list those under the "art" umbrella however. Either that or the easy way out when you can't get the debits to equal the credits.
My comment:
CEOs are not restricted to a brief period of years to make hay.
Reread my comment, I think you misinterpreted.
Nardelli comes to mind as a failed one who got rehired. Only God knows why.
LOL...Been there too. Have done my share of artistic estimating. "Feels like" don't often appease the auditors though. Need well-reasoned, sophisticated bullshit to satisfy them. I tended to do it for different reasons however. I'd take down reserves even when we didn't need the profit, in fact didn't want it, because, from an integrity standpoint, I felt it was the correct thing to do.
Never worried too much about job security. Was very good at my work and though I have been hammered a few times seldom was my job at risk.
Favorite story: Company I worked for, a small subsidiary of larger corporation, carried a lot of advertising and promotion reserves by project. Reserves were often used to sequester profits for future use as we were generally profitable to plan. As year end approached and knowing that I would have to justify the balances to auditors, I began to write some of them down based on history and age of reserve. I informed the VP of Finance what I was doing and my rationale and since he trusted my judgment he didn't question me.
After the close went to New York for monthly executive review meeting. I was not an executive but was primarily responsible for managing the financial statements so was there to answer questions. We had a better profit month than planned, some of it due to my adjustments. The VP of Sales stood up and railed for fifteen minutes about how finance had decreased his reserves and he was without funds to work with customers. He told the committee that he had to tell customers that he would have to cancel plans for this promotion or that because his funds were taken away. Everyone in the room knew who he meant by finance. After he finished I stood up and told him he was full of sh-t, that he would never tell a customer that he had to cancel plans and that we still had plenty of reserves left for any of his whimseys. He and I had always gotten along well and there were no repercussions. I don't have a lot of brains but I got gonads.
I am not an ideal employee in a big corporate environment. I am too independent and I don't suffer fools gladly.
Few strategies are bad when conjured up by pretty bright people, it is often the operational execution that backfires and that is an area where the CEO has the least impact.
Pet peeve of mine is that frequently new CEOs make a splash by laying off employees in their effort to effect bottom line improvements. I realize sometimes it truly is necessary but all too often it's just a cheap way of exhibiting progress, especially for Wall Street. Wall Street loves labor cutbacks and reorgs.
You are forgetting the "Field of Dreams" school of management. If you build it they will come.
I won't argue that most of them are not very bright, talented folks. Ethics and fair play is a broad spectrum and I have found many of them at various points in that spectrum. I am vehemently opposed to the excessive pay most of them receive. Granted most work hard and under great stress but so do their low level employees and the low level employees don't have a parachute period let alone a golden one. If the CEO screws up he likely loses his job, although not always, but either way if things go badly due to miscalculations or dumb strategies or whatever, a lot of little people lose their jobs for doing nothing more than working their butts off. The CEOs may never need another job but all those little people have families to feed, kids to send to college, car payments, mortgage payments and in recent years they have very few job options unless they can say, "Welcome to Walmart".
In most large corporations today, even if they have a good year, the little people will be lucky to get more than a 3 or 4% annual increase while the execs get big bonuses along with annual increases larger than 3 or 4%.
The American paradigm is that you earn commensurate with your work efforts. Nobody, and I mean nobody, "earns" 5 or 10 or 20 million dollars a year.
George Washington didn't win the Revolutionary War, he and his troops did. Without him, his troops under a different leader may or may not have won the War. Without the troops Washington would have, at best, gone down in history as a War Historian for King George III.
$40MM in working capital? Jesus, piece of cake! Add more Inventory Obsolescence Reserves or re-estimate your Miscellaneous Accruals.
weaseldog:
I know you know better but you communicate with sbvor as if he were a rational, thinking human being. Methinks not!
sbvor:
My replies are always commensurate with the quality of your posts.
robertmc:
Have to think about those ideas but at first glance they ain't bad.
Matt:
Oops! Meant re-evaluate your Inventory Obsolescence Reserves, down, not add to them.
"Small investors are losing their shirts but the Fed stands by to help the biggest." This is typical democrate thinking. Did we forget which party was the biggest supporter of FRE & FHM. It was the democrates that believe in Socialized Capitalism and now Uncle Ben and Uncle Pat are just trying to help prevent a panick! Lets give them a break! A lot of people rich and poor alike have lost money!
Art A Layman
I know Sbvor is brainwashed by the incessant preaching of Rush Limbaugh, Sean Hannity and others, and as a result, believes in illogical irrational things.
Still, this doesn't mean that my sensibilities must change in order to address his statements.
The neocons argues that we have to become our enemy to fight our enemy. We have to terrorize populations with shock and awe to fight terror. We have to torture people to fight people who torture people. We have to steal and vandalize to fight vandals and thieves.
Many have argued to me, that in order to fight people who commit evil deeds, we have to abandon the high ground and give up our ethics, moralities and laws and even our Constitution. That to save our freedoms, we must surrender them, so the state can keep them safe for us.
I do not agree with this line of thinking.
weaseldog:
Understand. Just fantasize for a moment though; wouldn't waterboarding sbvor be a trip?
"The American paradigm is that you earn commensurate with your work efforts."
Funny, I can't find that in the Constitution. Got to remember to mention that to Harrison Ford when we're negotiating his next movie.
You limit my CEO pay to a multiple of my lowest employee, and I move my company out of Amerika.
techperson:
Hasta la vista!
I'm not sure that capping CEO pay would really be much more than symbolism, a band-aid on a sucking chest wound. Oh, and I'm all for it!
grex1949:
There are those who would suggest that when facing an overpaid CEO with a gaping, sucking chest wound; first, do no harm and second, do nothing.
There exists so much talent in this country focused on circumventing laws and regulations that it is unlikely any real solution to the dilemma will be found.
Labor unions are no panacea but a return to stronger labor union influence would probably provide the best delimiter to excessive executive pay. Absent that unlikely event we are left with the tax code, albeit a feeble alternative.
I was wondering if there was a way to convince companies that leveraging to obscene amounts (say anything over 50:1 or maybe 75:1 being obscene) is a stupid idea. The higher those P:E's go, the harder it will be when they return to normal. Not even investment banks can get away with taking nothing at all (foreclosure-backed securities) and selling it as something really really profitable.
This is a GREAT IDEA that has practical application without requiring a major new bill or law. It should be any employee's compensation. So, all of those bonuses Goldman is getting, should all go to reinvestment in the company where future stock gains would be to the benefit of society
Why in the world would you want taxpayer money support private enterprises? This is the unique chance to finally get rid of Fanny and Freddy. Let them go under just like any other business that makes poor descisions. We'll be better off for it in the future. While interest rates will go up a few percent housing prices will come down a few percent. Don't believe me? Look what Sally did to college tutions. Once universities knew that students had loan guarantees they raised tution by about 400% over 10 years. They did not help one single student. All they did is force students into debt. Get rid of Freddy, Fannie and Sally. Get government out of the loan business. Get government out of socialising debt. If a business, be it a bank, auto maker or air line is failing due to poor business descisions so be it. It's not the taxpayer's responsibility to bail every idiot out.
Techperson, Harrison Ford has a proven track record in generating profits.
Over the last few decades we've seen crappy unproven CEOs earn giant salaries while losing money.
We've also seen proven losers destroy corporation after corporation, while earning more and more with each step, as they upgrade their golden parachutes.
As board members seem to be moving along with them, circumstantial evidence suggests there's more going on than meets the eye.
Can you imagine if any of our Governmental positions, (ie The President or Congressman used the same logic as CEO compensation mentioned by a previous anonymous post ...current markets sugest a successful president or congressemen should make "X" and we want a sucessful president or congressman, so therfore we will pay you "X" to do that job. This country would be in in even worse shape than it already is. Capitalistic greed supported by socialism. Lets face it most CEOs/CFOs/CIOs (or whatever other titles you can think of calling them, ie ASS-Os ) are capitalistic pigs without any worry for recourse for poor management decisions, because compensation is excessive and not really tied to any performance or or employee based pay. It is funny we can limit how much a company can put in retirement benefits for "highly compensated" employess, but there should be a limit actually on the amount of compensation that can be paid to any employee of a "publicly traded" company (with some exclusions for employee compnsation established with the company prior to a company going public). This will not ever happen though because pockets will be lined and votes bought off.
Techperson:
One less POS executive in this country is fine by many of us..there is the door don't let it hit you on the way out. It is funny that corps put pay caps(limits) on so-called lower scale positions, but don't mess with their "Gravy Trains".
good work ... great goin... visit mine...link1v
bravo. i appreciate your terms "private gains and public losses" which i'm sure statistically coincide greatly, if not exclusively, with republican administrations.
your recommendations are sound however i must agree with the user comment that their back wages must also be garnished, if any real progress is to be made. failing corporations always seem to cut out the legs of the table while hoarding the top for themselves. ensuring a place for the people who actually do the work there, it would make sense if The People are going to bail them out, we should ensure they still have jobs there too.
frankly i'm just fine with throwing white guys in jail for white collar nonsense. i'm sorry, any respectable organization is accountable for itself. if there's any corruption, there's plenty of room in jail for them and plenty of others to take over and operate the business responsibly.
When is the Fed. going to figure out that the American people with mortgages are too big to fail?
Privatizing profit while socializing loss ... obviously evidence that the pillars of our society are low-grade cheats.
Clever metaphysical rationales are the preserve of dictators; partiality has no place in the rational republic we are striving to implement on behalf of the emancipation project.
I do not humiliate the players I hate when beating them at pool. I might humiliate someone I care for, but not likely. Those I hate (if I slipped into that mode) I tickle ... like trout ... knowing all the while that objectifying others is evidence of deep-brain damage.
Partiality ... bias ... prejudice ... it's simply evidence of active neurosis. It pollutes the results such that little / nothing can be learned ... and causality is yet again obfuscated.
thank you sohbet
How about NO, NO & NO.
Why not privatize them wholly and get the bloodsuckers off the taxpayer's backs for GOOD!!!!!
Why don't American dimwits see that EVERYTHING govt touches, it does so purely for it's own aggrandizement? BOTH parties!
That they can veil repeated malfeasences in the commie "common good" mantra is icing on their rotten cake never shared with the producers who pay the freight - us.
Raines & Mozilo pocketed millions in comp right along as they mismanaged Fan & Fred they knew full well would fall to taxpayers, hence their total neglect since they got theirs no matter.
The criminal bastards oughta be hung.
Abolish the Fed and it's interest expense on the people, ergo the Income Tax, ergo the IRS.
Then repeal ALL foreign aid better left in the American's hands that earned it
Then abolish the multitude of Govt Depts all designed as taxpayer ripoffs and aggrandizers of the elite run govt of criminals.
And start with education, such that those w/o children do not pay the educations of those with them.
Ever heard of the equal protection clause??
Likewise abolish EVERY SINGLE tax shelter, trust or foundation that elites use to shift govt's tax burden onto the masses that IT most benefits from in it's tax avoidances.
This is precisely what Jefferson's Declaration had in mind and excoriated KGIII over.
Today's longest train of govt's abuses makes KGIII's look like mere chump change by comparison.
Even the Maestro knows better.
Alan Greenspan - “Gold and Economic Freedom” 1967
"An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other. . . . This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."
sbvor has it dead right, EXCEPT, his cherished Reps (once mine too) were no less complicit than the commie Dims.
Indeed the Republican party has it's whig big govt roots in deeper pinko territory than the Dems of Jefferson did, before they colluded for the ICC.
The Republican Party: There are NO conservative roots there.
http://albensonjr.com/noconservative.shtml
The battle for our freedom lays predominately in statism vs limited govt. Not left versus right for both of those sides push for ever bigger, costlier, and more unaccountable govt.
The progressives - both parties - colluded to have the statism they were jealous of the Euro-dictators having all for themselves. Rockefeller/Morgan sphere elites WANTED the marriage of govt and big biz and the govt's protection from competition via monopoly cartel from banking to RR's.
The Fed & Fed'l Inc tax were just the small end of the wedge crammed into our constitution of ltd govt as it was intended. Without taxes to pay Fed interest there never would have been a Fed, as goes ALL central banks of fraudulent fractional reserves allowed NOWHERE else in ANY industry where it is immediately seen as criminal.
Such as when one expects his goods to be in the warehouse whenever he goes there to get them.
Thin end of the wedge people. That is govt's and those who run it's, tactic. It goes back millenia.
I can't really blame the total ignoramuses here that believe there is any REAL differences between the majopr parties, having believed so myself once.
So in the spirit of educating BOTH sides, here's an article that shows how indeed they work more closely against the average taxpayer and for themselves, than either ever had worked FOR the people.
So here's a gift of the bigger picture govt prefers we are ignorant of and works to deny us with billions of our own money in their propaganda of winner's history and self justification.
"Wall Street, Banks and American Foreign Policy"
http://mises.org/resources/1223
Put this eye-opener under your belts and stop being clueless dupes of the State.
You too Bobby-boy.
SBVOR / OMNIVORE... ??
.. whatever the name or the specie, someone please open the gate and let "it" out to pasture.. it's got to go back to the land to graze...... and stop crowding this blog. SORRY!
Any economists out there that can develope a robust system model of our current economy? Or are they all content to remain mushrooms?
The count 7 million forclosed homes and still the number is growing. Certainly some economists can see the positive feedback loop between new forclosures, decreased property values, decreased real estate tax revenues, decreased household spending, increased unemployment and all leading to more foreclosures.
This downward spiral will not stop until mortgage principal values are equal to or less than current property values.
Current bailout plan does not place a stop to this current downward spiral that is the root cause of the current recession/depression.
Please Dr. Reich, If you join Obama's cabinet, consider a tax credit to all holders of mortgage backed securities equaling to the difference between note value of the motgage and the current value of the real estate held as colateral when mortgage holder renegotiates the note without displacing the current home owner in a forclosure.
The credit to the mortgage holder may be spread over a five year period. It will stop the positive feedback loop causing continued devaluation of real estate that mortgage holders are counting on to collateralize their secured loans.
An economic system model will show that this is the only way to stop the downward spiral of real estate values caused by forclosures.
With 68% of household expenditures ruled by net household financial holdings less mortgage housing expenses, why is anyone surprised that our country is going down financially in a recession.
The above is the only way to guarantee a stop to the downward spiral. Trillions will be wasted and if the downward spiral caused by the above positive feedback loop is not corrected, the problem will continue to remain and will continue to get worse.
Create the system compartmental model and it will show the above correction will work.
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