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Obamatax on Banks - Not investment related


Uccmal
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I saw a quote from a Republican Rep who commented that the US banks behaviour toward bonuses was 'just stupid.  They might as well have put a sign on themselves saying just shoot me'.  Cant recall who it was.

 

Anyway, I am extremely disgusted with the bonus situtuation at US banks right now.  From my standpoint Goldman Sachs, JP Morgan et al would all be out of business if it were not for the intervention to save their counterparties.  I cant blame Congress or the Administration if they want to take away everyone's bonus going out ten years.  Essentially it amounts to the government directly paying investment bankers at the aforementioned collection of companies these bonuses. 

 

It strikes me that there would be some million Americans who are probably qualified and ambitious enough to be investment bankers for a salary of say 1 million per year clean.  Essentially, everyone at a company who directly, or indirectly, received benefit from bailout money should be paid only as much as the highest paid person at a crown corporation (about 1.5 million) in Canada.  Wind it down over a ten year period until it is deemed to be fully paid back.   

 

As for the banks threatening not to lend, they can be legislated to do so easily enough. 

 

BTW - I am not adverse to merit pay.  I just dont buy the BS that these investment bankers are any more talented than 1 million other Americans who would kill for their jobs, even if they only paid 1 million. 

 

Let the flames and arrows begin...

 

 

 

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Nothing wrong with merit pay, but there's only '1' best. He/she works for XYZ coy, the others don't; & he/she is only there as long as XYZ coy makes an outsized return well above the market. Everyone else is a 'wannabe', & you don't pay 'wannabe's' the premium for 'best'.

 

Supposedly if you don't pay - the talent leaves 'en-mass'; let them! The banks they left collectively return to the mediocre 'norm', become smaller (asset loss to more aggressive competitors), & less risky. Yes, the talent could start up hedge funds - but they'll have a lot less AUM - & even with inflated payouts the takehome will still be less than have now with the bank. Then if you really are so hot, you aren't the #1, & you didn't hit the highest bid within 6 months - you're past your 'best before' date; so why should I pay you?

 

Triple base pay to make the bonus smaller, & fire as soon as the bank fails to make its ROE on the investment desk. Firings will be much quicker as the higher base pay increased fixed costs, & the talent has an incentive to manage the size of their base pay. Here today, gone tommorrow - the capitalism that made the gains in action.

 

London has already been through this, & the talent didn't leave 'en-mass' - so why should a US banker in the same marketplace act differently ? Or is a US banker just more arrogant ?.

 

SD 

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Guest kawikaho

I agree.  I hear ya.  It's near unanimous that these bonus payouts need to be halted, and future compensation schemes need to be limited.  If the best and brightest want to go, let them.  Where else would they go that pays out six to seven figures?  Health care?  Good, we need more docs.  I also think they need to address the idea of too big to fail.  They had legislation previously that addressed this, and they need to reinstate it.

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I may be nuts - but it sounds like the tax impacts shareholders, not employees.  That is a joke.

 

I can't speak for the Canadian guys on this board, but the U.S. laws allow very few shareholder rights.  Board of directors are very tough to remove.  Management can only be changed by board of directors.  Usually the majority of stock is owned by mutual funds that are not very activisit (since each fund may hold 50 - 30 different stocks).  U.S. Tax laws give management teams incentive to lever the company to boost the share price.

 

This is all a disgrace.  In essence, a CEO can come in and do what's right for him/herself - not what is best for shareholders.  There are very few Buffett's that act as CEO's of risk management.  Management/employees are enticed to take on risk b/c their capital is NOT at stake. Heads I win, Tails the shareholders lose.

 

So I am not sure how a tax on shareholders is the way to go.  How about increased shareholder rights?  How about repealing tax laws that encourage levering up the company?  How about better regulation (CDO's were a mess) and capital requirements?

 

How about congress and the President (not blaming Obama here though) stop accepting payments from the banking industry.

 

 

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Bronco, That is very well thought out.  So, basically shareholders need to vote with their feet.  Up until the 1980s many companies paid out a high proportion of the earnings as dividends.  Perhaps shareholders need to insist on high payouts (BRK being an exception) and reward stocks in kind by buying them. 

 

One of the best ways for Congress to prevent future stock juicing would be to favourably treat dividends.  This would then create more of an owner culture among large companies.  Dividend it out or your stock price suffers. 

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My opinion here is biased (I work in ibanking). However, I would proffer that there are separate things that should be debated here:

 

1.  Can financial institutions be "too big to fail" and deserving of social bailouts?

2.  Should the government have the power to impose limitations on size of compensation between two private parties in the private markets?

3.  Should the government have the power to impose limitations on type (i.e. 5 year restricted stock vs. cash)of compensation between two private parties in the private markets?

 

I think 1 should rarely if ever happen.  

 

2. I dont think should ever happen.  The government has no right to impose limitations on the ability of a person to earn a specific wage.

 

3. I think should happen only for firms that are deemed "too big to fail" and therefore potentially needing a bailout down the road.

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I may be nuts - but it sounds like the tax impacts shareholders, not employees.  That is a joke.

 

My thoughts exactly. 

 

As far as the bonuses are concerned in the first comment, these companies shouldn't have been bailed out in the first place, and then the bonuses wouldn't be a problem. 

 

-For companies that ARE bailed out, limiting compensation restricts ability to retain best EE's when they can jump ship and make more elsewhere.

-Limiting comp on the INDUSTRY AS A WHOLE would be the equivalent of a barbaric 1917 Russian Revolution.

 

 

There should be specific rules, i.e.

1.  If you are a financial firm on a watch list created by the fed, you are deamed "too big to fail"

2.  If you are on the list the Fed has the power to shut you down (outside of BK courts) and wipe out stockholders AND BONDHOLDERS (this did not happen in a single bailout)

3.  If you are on this list you pay additional insurance costs similar to FICO for bailout protection.

4.  If you are on this list you are restricted to a Pay Czar that has the power to limit TYPE of comp (long term restricted stock) but NOT size of comp

5.  Fed has power to shut down firm at any time, so would provide guidance ahead of time on risk limitations, and what would trigger being shut down (i.e. capital below X)

 

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2.  Should the government have the power to impose limitations on size of compensation between two private parties in the private markets?

3.  Should the government have the power to impose limitations on type (i.e. 5 year restricted stock vs. cash)of compensation between two private parties in the private markets?

 

 

If one of the private parties is a Board of Directors whose decisions are destroying owner/shareholder value with an added destruction premium of liability insurance paid for by the company against being sued for doing exactly the opposite of what they are supposed to, then Yes I'm all for goverment intervention on my behalf.

 

Now I'm sure everyone on this board would intervene on their own behalf and sell (or not buy in the first place!), but that's not the bulk of the herd out there.

 

I prefer some sort of requirement for skin in the game doled out over time.  Perhaps requirement that any compensation over a certain amount has a medium-term performance (5 year rolling average) kicker built in with clawbacks to keep the book-cookers honest. 

 

 

 

 

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I'm not expert but I think it would be a lot easier to swallow the pill in financial markets if the legislation would not be seen as tax.

 

I would suggest that they create a separate account a the FED that would collect a % of all the bonuses. The proceeds of this account would be used in case a bailout is needed. The retention rate on the bonus would vary depending on the funding requirements.

 

I see the following advantages:

-It would not be perceived as taxpayer's money anymore. Unless the accounts gets depleted.

-It would act as an insurance at stabilizing the financial market.

-The government would intervene a lot less often.

-On the long term, the beneficiary of this system would clearly be the financial market.

-The incentives to avoid financial fiasco would be greater. Exactly like any insurance, if I make a car accident I'm insured, but I won't want to create on  with risky behavior because I will cost me extra $$$ in premiums for the rest of my life.

-This would give greater control to the FED to pop-out potential bubbles.

 

Beerbaron

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Government should not have a say in corporate compensation issues. However govt. should immediately pass legislation that allow shareholders a say. What passes for democracy is a joke for most public companies. The only way I can be assured to have a say on compensation or any other very important issue is to own 50% plus 1 share of a public co. When I reach that magic number  I then can plunder the company at will. Nominating committees of the boards for future board members should be comprised entirely of  non-related institutional shareholders  and large individual shareholders and their selection should be entirely free from any input from management.

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Uccmal - I agree - there should be dividend parity with share buybacks.  In essence, you would eliminate the double taxation to shareholders as well.

 

My big thing is that if boards declare a share buyback - I think shareholders should be allowed to vote on whether they can take that cash and opt for a dividend distribution in lieu. 

 

Power to the shareholders - not the government.  That is the real long-term fix.  Quite frankly, this would require a lot of work from federal and state governments.

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I wish the government did not pursue this any further.  They forced companies like Wells Fargo to take the TARP money for cosmetic reasons, and it's clear that they did not want to take it.  Every single quarter they have made progress towards rebuilding their capital levels through profits.  Now, they are punishing Wells Fargo and behaving like it was a "bailout".

 

Why do they have low capital levels?  Because their took the writedowns on Wachovia before buying it... a lot of the other firms only look better capitalized because they are dribbling out the writedowns instead of doing it in one big bang.

 

I also take exception to the idea that the remaining banks need to recapitalize the FDIC with special assessments.  The mistake was made several years ago by not requiring all banks to pay a higher insurance premium to the FDIC to ensure that it was capitalized enough to withstand the storm we are going through right now.  Instead, the politicians wait until the crisis hits, they wait until the bad banks go under, and then raise the premium and impose special assessments.  In other words, if you are a good bank Wells Fargo, you need to pay for the sins of the bad banks.  That's just insane in my opinion.  All the banks, good and the bad, should be paying equally, but instead we have it rigged so that we wait for the bad to fail, and then concentrate the costs on the good banks.  Why punish the good banks who did nothing wrong?  The FDIC exists to save the depositors, I think the tax payers should ultimately bear the cost of the special assessments, it was their duty to put the right people in office in the first place and they failed at that... their elected representatives did not get the FDIC adequately capitalized in the first place. 

 

The tax payers (in my opinion) need to feel some pain when they elect the wrong people...  When the politicians failed to regulate the CDS that AIG wrote, did they re-elect those same people?  Did they push out the people who deregulated or failed to regulate, or did they elect them for an additional term?  How many letters did they write to their congressmen demanding that AIG's CDS get regulated, and that the FDIC was undercapitalized? 

 

I think it's disingenuous to just blame Wall Street for "greed" when really the problem here (IMO) is taxpayers voting in the wrong representatives.  We talk about how hard it is to remove a director when it comes to CEO compensation, but how about getting your elected officials in government to do the right thing?  If the elected officials would only manage risk appropriately in terms of things like CDS regulation, discourage (through regulation) the kind of lending practices that got us into this mess in the first plac, and ensuring the FDIC is big enough to handle failures at large banks...

 

Nah... couldn't the taxpayers that voting these people in that allowed the crisis to happen... the tax payers and their elected representatives have framed the debate such that they are not responsible.... Wall Street is.  I don't buy it frankly... the taxpayers (through their elected officials) had the power to stop this crisis dead in it's tracks long ago.  They failed to act and now they just blame somebody else... Wall Street greed "fat cats".

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Thanks you all. I fully expected this thread to turn into a useless debate on free markets vs socialism, and you all have really shown me that I need to raise my expectations.

 

ERICOPOLY has some very good points.

 

Most of the documentaries that I have watched about the crisis point to a theme of deregulate or dont regulate. The problem doesnt seem too complex and Paul Volcker (Charlie Rose in September), Warren Buffett (Charlie Rose in September), and other smart people have all offered up excellent ideas on regulation and compensation requirements.

 

The problem is Washington doesnt get it or doesnt want to get it. We have a bunch of people who believe in unrestricted capitalism or unrestricted useless and aggressive regulation (Fannie and Freddie had 200 regulators and the Congress watching them and failed). The same people who basically caused the crisis (Congress, and Obama's economic team) are running the clean up which makes no sense, and that is the fault of the tax payers.

 

 

Frontline Breaking the Bank - http://www.pbs.org/wgbh/pages/frontline/breakingthebank/view/?utm_campaign=viewpage&utm_medium=grid&utm_source=grid

 

Frontline The Warning (Very Good related to CDS) - http://www.pbs.org/wgbh/pages/frontline/warning/view/?utm_campaign=viewpage&utm_medium=grid&utm_source=grid

 

Frontline Inside the Meltdown - http://www.pbs.org/wgbh/pages/frontline/meltdown/view/?utm_campaign=viewpage&utm_medium=grid&utm_source=grid

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Guest kawikaho

 

2. I dont think should ever happen.  The government has no right to impose limitations on the ability of a person to earn a specific wage.

 

 

If this is the case, then do you think the gov't has no right to bail out the capital markets and the financial companies?  You shouldn't have your cake and eat it too.  The fact that the gov't and the tax payers shelled out much dough to save these idiots gives them every right to impose restrictive legislation. 

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2. I dont think should ever happen.  The government has no right to impose limitations on the ability of a person to earn a specific wage.

 

 

Sure they do. It's called the progressive tax system.  To an extreme the government could impose a 100% tax bracket for the highest income earners.  The government has a right to tax its people.  That is by law.  So I don't understand how you say 'the government has no right'.  That statement is completely false, the government has every right as long as it's passed by law.

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I am surprised that there is no push for seperation of banks from investment banks/securities firms.  This is the answer to the problem that none of the current players wants because it will no longer let the banks core business subsidize the more risky businesses and there may be more competition, the real source of wage deflation.  Volker is only one I have heard talk aboiut this but he seems to have dropped off the face of the earth as Summer and Gietner (protectors of the status quo) continue with this make believe financial reform (much like what health care reform has turned into). 

 

Packer

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The Public Option for Wealthcare Reform

 

By Sir Wesley Mouch

 

Let’s face it: our private system of wealthcare is broken and must be changed in the public interest. Greedy bankers and fund managers have caused the destruction of trillions of dollars of wealth in the last two years while raking in hundreds of billions of dollars in undeserved profits.

 

In contrast, the Social Security System is an exemplary, low cost provider of financial security that shows how wealthcare could be transformed with a single payer plan. A Public Option Mutual Fund would insure investors against losses just as the FDIC insures bank deposits. This is the only way to fix a system that is fundamentally flawed.

 

Surely, we can all agree that  investors would be better off with a public option, a giant fund run by illuminati on the public payroll like those superior individuals who now manage the financial institutions taken over by Uncle Sam.

 

A public option would cut out all the middlemen and their unnecessary fees.  It would have access to low cost government financing, thus avoiding having to pay exorbitant margin interest charged by private providers.  No one would be refused the opportunity to purchase shares in the fund, and every shareholder would have an absolute guarantee against suffering a loss! 

 

The private system will still be allowed to continue during the transition to a single payer plan, but higher net worth investors will pay a penalty on their tax returns if they don’t participate in the public option. The Public Option Mutual Fund will be a huge improvement over the sorry financial performance of the broken private system.  It will be available at no cost to the public, paid for entirely by cost savings taken out of the inefficient private system and by a tax (sorry, my bad) actually, merely by a fee on the most successful fund managers and companies that took advantage of their less fortunate peers who, through no fault of their own, suffered large financial losses in recent years.

 

Participation in the Public Option Mutual Fund by financial institutions will be entirely voluntary, but any financial advisor or fund manager who refuses to provide a similar guarantee against losses for the accounts they manage will in all fairness have to pay a fee of 20% of the value of each account into the Public Option Mutual Fund.  However, those very large private funds that are first to get on board and support the public option will be exempt from this requirement.

 

I hope that all public-spirited citizens will join me in putting self-interest aside to do the right thing and support the Public Option Mutual Fund.  If we don't take this bold step to fix the broken system, we will have only ourselves to blame, and financial managers will lose the opportunity to be exempt from financial malpractice lawsuits as promised if they follow the government’s best practice guidelines for low risk investing.

 

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2. I dont think should ever happen.  The government has no right to impose limitations on the ability of a person to earn a specific wage.

 

 

If this is the case, then do you think the gov't has no right to bail out the capital markets and the financial companies?  You shouldn't have your cake and eat it too.  The fact that the gov't and the tax payers shelled out much dough to save these idiots gives them every right to impose restrictive legislation.  

 

No, I don't think that the bailouts should have happened.  

 

Further, the employee is not the company.  Wipe out shareholders and bondholders if you want to punish the company for getting bailouts.  Bailouts were agreements between company's and the GOVT (the word agreement is a stretch, look at WFC).  Employment agreements are between EE's and companies.

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2. I dont think should ever happen.  The government has no right to impose limitations on the ability of a person to earn a specific wage.

 

 

Sure they do. It's called the progressive tax system.  To an extreme the government could impose a 100% tax bracket for the highest income earners.  The government has a right to tax its people.  That is by law.  So I don't understand how you say 'the government has no right'.  That statement is completely false, the government has every right as long as it's passed by law.

 

Have you ever read Atlas Shrugged?  I suggest you do.

 

"That statement is completely false, the government has every right as long as it's passed by law." - This is probably the dumbest statement I have ever read.  Have you ever considered what gives the government the right to pass a law? 

 

The government has only powers, given to it by the people it governs.  The definition of an illegitimate governing body is one that exercises powers in excess of those given to it by the individuals it governs.

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I think even Greenspan will agree that "there was a fundamental flaw" in Ayn Rand's theories.

What would it take to convince you that those theories are simply theories and dont work in the real world?

 

Would you have really preferred that most of the Major financial institutions in the World have collapsed?

 

I wouldn't but would have preferred for the government to actually negotiate during the bailout. You cant do bailouts then refuse to bargain / negotiate to preserve a free market that you are basically bailing out. Which was there reason for not negotiating.

 

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