George Wills Law

On the March 30th ABC Sunday news program This Week with George Stephanopoulos I saw a coming together of political minds that was quite unexpected, almost stupify. Here were Newsweek’s George Will, NTime’s Paul Krugman and economic author Robert Reich all agreeing on George Will’s Law.

A little background. The show was doings it usual, discussing some of the key issues on this week’s radar screens in Washington. So given that the Fed had just bailed out some of the major Wall Street investment banks for ever increasing billions (now well past the $500 billion total and looking like a mini Iraqi War financial debacle – see our series of articles), this was the number one issue at the roundtable. And George Will was arguing against any bailout of homeowners faced with foreclosures. Basically George was saying that Main Street did not deserve the same bad debt bailout that the big Investmank Banks had just gotten and will likely continue to get. And this decision despite the fact that the Investment Banks had committedthe same folly or even worse as mortgage borrowers – extending themselves too far. Investment banks like up untenable positions in the mortgage market due to their very risky high levels of financial leverage (playing with others money versus their own to the tune of 30 to 1 ratios or higher banking on the realestate market going forever up), use of derivative financial instruments on the mortgages that even their creators could barely evaluate with any accuracy (let alone Moody’s and Standard and Poors that got them terribly wrong).

So George seemed to be advocating a pox upon all bailouts but conveniently after his banker admirers had already gotten three rounds of their Moral Hazard Insurance from the Bailout Bank …. err Federal Reserve to the tune of half a trillion of Taxpayer’s Moneys including the latest special FRB Discount Windows for up to $200 billion. In effect George was saying “now that the Banker horses have stampeded out of the barn … its time to close the bailout barn doors now that Main Streeters and John Q. PublicHouseholder, faced with foreclosure, are now starting to queue up for some of that Bailout Hay too”.

Paul and Robert were arguing a remarkably similar Moral Hazard position – just from the Antipodes. Just as in the case of the Investment Banks (which the government could not let go under because of the effects that it would have on the Nation’s banking system) – Paul and Robert were arguing you could not just let 2-5 million families (of the approximately 80 million homeowners in the US) be foreclosed. This should not and could not be done because it would a)not just ruin/blight whole neighborhoods but regional economies and b)it could lead to a sharper domino effect decline in consumer spending – and deepen the current recession. Then the two proceeded to advocate the respective positions of their respective Democratic candidates – whats good enough for Wall Street bears should also be accorded $10B and $30B respectively. Hmm they just don’t have that Investment Banker Flair – ask for a $Trillion of Bailout and you surely will get at least half that

To which notion, George again mocked the two Main Street bailers and then surprised them with George Will’s Law.

It was as if George was out to prove to these incorrigible liberals that he was, indeed, serious about No Bailouts for Bankers. George Will then announced that His Law stipulates that if Investment Bankers were to see fit to dip into the Public Purse then by law their top executives’ total compensation for that year would have to take a cut down to public administrators top salaries. This would mean cuts by at least a factor of 1000 or more for the Investment Bankers . Since Investment Bankers in good times pull down $200 million to 1,500 million annual pay packets and generally the same in awful times too ; George Wills Law would reverse the latter awful times pay. George was suggesting that in awful times when Investment Bankers were delivering to their shareholders huge losses, then they must take Darwinian cuts in pay(even payback to the Bank a % of their previous year’s pay). George implied that his Law would insure that investment bankers would work triply hard to never get in this pay hazard situation.

Now this notion got Paul and Robert’s attention. Because they know that just about all top executive compensation <u>never goes down</u>. Not even in the worst of times. Remember when Steve Jobs so famously took $1 in pay at Apple. Minor detail – his total compensation including stock options was in the dozens of millions of dollars. This is what is missing in pay packet arguments (see Henry Blodget doing the fako scam here – he neglects to mention the annual stock option awards and multiple other annual percs and payments). And because stock options get taxed at the lower capital gains rates, poor $1 Steve Jobs paid a fraction of what he would have to for salary income. And you thought he was making your Apple Computer a bit cheaper with the cut in salary. Yeah, right – its Silicon Valley Sleight of Hand.

The Importance of George Wills Law

Total compensation for top executives of the Fortune 1000 companies – average slightly over $14million a year. Yep less than a tenth of what top Investment Bankers, Hedge Fund managers and Private Equity Executives make. The importance of George Will’s Law is that it draws attention to two major dysfunctions in American economics. First, Investment Bankers are hyper compensated. And their compensation, like most top executives, never goes down. Even if they perform very poorly they still get hyper-compensated because”tough times deserves better pay”. And if they get fired, they inevitably have a golden parachute severance package amounting often times to a significant multiple of their annual total compensation. Now contrast this to the layoffs and downsizing they are frequently imposing on various portions of their workforces. Only the big auto labor unions have managed to negotiate golden parachute “buyouts” for their members. I shall look at the question of hyper*wages in more detail in about 5 weeks.

The second key fact is that George raised the question of regulating the Investment Banks. If the Investment Bankers are constantly looking to the Fed for bailouts (4 major ones in the past 15 years), then they should be subject to regulations like the commercial banks who, in exchange for insurance on their depositer’s balances up to $100,000, are subject to regulations which include capital requirements, reporting requirements, and limits on types of financial instruments they can use. These rules lower the insurance risks the Feds have taken on. As the ultimate banker, the Fed should demand the same of Investment Bankers and any other financial institution periodically requiring bailout help from the Fed.

So what George Will’s Law has done has raised the issue that Investment Banks should be regulated. Needless to say the Investment Bankers are none to enthusiastic about this proposition . US Treasury Secretary Henry Paulson, a former Investment Banker himself, is trying to get out a head of the storm and define what regulations are to be made. Suffice it to say – Paulson’s Plan is minimal regulation requiring only mortgage lenders be more explicit in spelling out the full range of costs of their mortgage plans has not cut the mustard, even in the Business community.

It is argued that many consumers got pressured into taking variable rate mortgages not fully understanding when and how much the variable rates higher costs would be incurred. However, this proposal does not address some of the key problems like very high leverage, poorly understood debt and derivative instruments, low foreclosure protections, etc. Suffice it to say, George Wills law deserves another look see in 5 days or more. Worse – this is no April Fools Joke.

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