Sunday, March 22, 2009


The Obama Administration has evidently decided that the solution to the nation's financial woes is...more regulation. Here are some highlights of a New York Times story on the initiative:
The officials said that the administration was still debating the details of its plan, including how broadly it should be applied and how far it could go beyond simple reporting requirements. Depending on the outcome of the discussions, the administration could seek to put the changes into effect through regulations rather than through legislation.

One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company.

The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission.
Let's think about this. Implicit in such moves is the notion that the government knows better how these companies should be run than the companies themselves do -- an absurdity. Second, what on earth does executive compensation have to do with solving the financial crisis? Did the financial crisis have anything to do with CEO pay? What's more believable -- that this is an integral part of solving the financial crisis or a sop to public opinion convinced that CEOs get paid too much? Lastly, why is this being applied to all companies rather than just those accepting bailout money? If a company isn't accepting bailout money isn't that an indication that they are doing just fine the way they are?

On a related note I watched Obama's interview on 60 Minutes this evening and he was asked about proposed caps on compensation over $250,000 for people on Wall Street He responded that people who complain about such measures should "spend sometime outside of New York" citing states such as North Dakota and Arkansas where people would be happy to get a job that paid $75,000 without a bonus. What a ridiculous comparison. First off, should Wall Street compensation be determined by people in North Dakota? Do voters now get to determine how much people should be paid? And surely Obama has spent some time in New York, does he have any clue just how far $75,000 would take you there?

Moving along:
Officials said the plan would also call for increasing the levels of capital that financial institutions need to hold to absorb possible losses. In a sign of the economic system’s fragility, officials said the administration would emphasize that those heightened standards should not be imposed now because they could discourage more lending. Rather, they would be put in place after the economy began to rebound.
This really makes me shake my head. Basically the logic is that capital requirements should be increased to stave off future crises but isn't applicable now because we are already in one. I don't get this at all. Aren't crises times when more rigor rather than less is needed? Again, the underlying premise here is that government bureacrats have a better handle on how to run these businesses than the businesses themselves.
A broad consensus has emerged among regulators and administration officials that hedge funds must be registered and more closely monitored, probably by the Securities and Exchange Commission. But officials have not decided how much the funds will have to disclose about their investments and trading practices. The officials spoke on condition of anonymity because the regulatory plan was still being formulated and they did not want to upstage Mr. Obama or Treasury Secretary Timothy F. Geithner, who will describe the plan when he appears before Congress on Thursday.
Interesting fact: hedge funds actually outperformed stocks during the financial crisis according to date from October of last year. They've weathered the current environment better than most, yet this will not stop attemps to increase the level of regulation on them.
A central aspect of the plan, which has already been announced by the administration, would give the government greater authority to take over and resolve problems at large troubled companies not now regulated by Washington, like insurance companies and hedge funds.
Because they have been doing such a great job with the companies they have already taken over? Ask yourself, does any of this seem like a real solution towards healing the economy or a case of CYA with the administration now able to say "Hey, at least we did something"?

Update: Related thoughts here.

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