Micromanagement Czars

We are currently inundated with populist outrage regarding Wall Street and their “egregious” pay packages on the false presumption that :

1. all of these companies would have failed without the government bailouts (true in some circumstances, but not others) and/or
2. taxpayer money is being used to pay 7 and 8 figure bonuses to “greedy” Wall Street bankers.

Goldman Sachs has been the lightning rod for this criticism in the media, in Congress and with the Obama administration. Earning $3 billion plus in profits over the last three months and setting aside $11 billion plus (so far) for 2009 compensation generates fantastic headlines and sound bites.

However, of all the entities receiving government money, Goldman Sachs is actually the least deserving of this criticism as they have repaid their government investment in full (which they never wanted or needed in the first place), and on top of that, have also paid interest, dividends and warrant settlements of over $1,000,000,000 – generating a 22% annualised profit for US Taxpayers. This Taxpayer profit does not include the additional billions Goldman Sachs will pay in income taxes ($4 billion accrued for 2009 so far), the billions its employees will pay in income taxes, the thousands of people they employ, the number of businesses supported by their presence on Wall Street and elsewhere, etc. It’s a similar story for JPMorgan, Morgan Stanley and others who have repaid their government obligations.

As a taxpayer, I’m very happy with these investments – generating a return for our country that would make any hedge fund manager jealous.

For entities like Citigroup, AIG, GM, and Chrysler, those who were truly saved by the government investments, I can understand the backlash. US Taxpayers are significant shareholders in these businesses and therefore have every right to criticize the decisions made by management, including compensation decisions, regardless of how misguided those criticisms might be.

However, we need to ensure we project our populist rage equally to everyone making big money while working for entities that receive, or have once received, government assistance.

For example, how about this one:

Dennis O’Connell, who oversees props at New York’s Carnegie Hall, made $530,044 in salary and benefits during the fiscal year that ended in June 2008. The four other members of the full-time stage crew -- two carpenters and two electricians -- had an average income of $430,543 during the same period, according to Carnegie Hall’s tax return.

Great work if you can get it, and honestly, other than the fact that these payments are due to legalized extortion by a too-powerful union against a charity, I think it’s great.

Clearly these guys are the absolute best at their trade, probably have years and years of experience, and contributed to a season of memorable shows, concerts and events at Carnegie Hall. After all, we live in a capitalist society (for now at least) and at the end of the day you are worth what someone is willing to pay you. These guys must be doing something right.

However, using the logic of the media, Congress and Obama administration, this should cause some serious populist outrage because, while largely funded by private donors, a substantial amount of Carnegie Hall's funding is also provided by taxpayers.

The Carnegie Hall annual report for the 2007-2008 fiscal year lists the 13 donors who gave more than $5,000,000 – a list that includes the City of New York, State of New York and the United States Department of Education – i.e. taxpayers.

Given this taxpayer support, should Compensation Czar Feinberg be approving the contracts of prop carpenters and electricians at Carnegie Hall as well?

Where does it stop?

I couldn’t care less about Mr. O’Connell’s paychecks, but the example highlights just how out of control the populist rage is on the topic of compensation.

Our country needs to move on and concentrate on the real issues (out of control government spending, two wars, unemployment, education, etc.), and leave the micro-managing of compensation decisions to someone else.

In fact, cutting off our nose to spite our face is the simplest way of ensuring that Taxpayers lose as much money as possible with these bailout investments. Compensation restrictions will only cripple the ability for these entities to attract and retain the talent required to dig themselves out of their holes and repay the government.

I’m just a random guy giving my own opinion, but Kenneth Langone, co-founder of Home Depot Inc. and a former New York Stock Exchange board member is more qualified to comment and according to Bloomberg, he says the pay cuts are “sheer stupidity.” He continues that “the taxpayers have an enormous financial risk in these companies, and very simply stated, I want the best person. If I needed neurosurgery, I would want the finest doctor I could get, no matter what I had to pay for it.”

Quote of The Week - Oct 16

"This golf-cart fiasco perfectly illustrates tax policy in the age of Obama, when politicians dole out credits and loopholes for everything from plug-in cars to fuel efficient appliances, home insulation and vitamins. Democrats then insist that to pay for these absurdities they have no choice but to raise tax rates on other things—like work and investment—that aren't politically in vogue. If this keeps up, it'll soon make more sense to retire and play golf than work for living."

- WSJ Editorial

Leave the Kitchen Worker Alone

I almost threw my Blackberry off the Starbucks price board when I saw the following “Breaking News” email from the FT while waiting for my coffee – “Kitchen worker received AIG ‘retention bonus’”.

The two line article teaser then goes on to say that a kitchen assistant received $7,700 as part of AIGFP’s $168 million retention bonus program in March of this year. I’ve covered the issue of populist bonus bashing before and don’t intend to rehash it here, but the fact that this is front page news worthy of a “Breaking News” email is absurd.

Where are the articles asking about the other $159.8 BILLION that has been used to prop up AIG? How about $55 BILLION union gift, er, bailout of GM/Chrysler? Where are the articles highlighting the fact that all but a handful of problem banks have repaid all of their government money, including hefty dividends and interest payments, in less than a year?

Why does the media feel the need to vilify individuals who had nothing to do with the crisis or the bailout, especially someone like a kitchen assistant? This is a new low for the populist media, and while I would expect this from the New York Post, MSNBC or Fox News, I thought the FT would be above this sort of populist baiting.

The $7,700 bonus paid to the hard working kitchen assistant, whose worst sin might have been ordering the wrong lunch on occasion, equals exactly 0.000005% (5 one millionths of one percent) of the government bailout amount provided to AIG. In fact, the total amount of “retention bonus” program is only 0.1% (one tenth of one percent) of the total bailout amount.

Lastly, this is nothing more than crying over spilt milk. All bonus amounts were agreed and in legal binding contracts, making them next to impossible to take back without destroying the sanctity of contract law.

Shouldn’t we focus our attention and scrutiny on making sure taxpayers are reimbursed as much of the $160 BILLION dollars committed to AIG as possible, without getting hung up on what amounts to a couple of leaves in the vast forest of government bailouts?

Representation without Taxation

While attempting my first half-marathon, I decided that listening to a podcast would sufficiently distract me from my wheezing more than my usual music playlist. So as I set off, I hit play on Bill Maher’s HBO show, Real Time.

If you’ve read this blog before, you may be surprised to hear that I would listen to Maher’s show, but I find it thought-provoking and funny, and while it is heavily slanted away from many of my views (at least fiscally), I like that Maher is usually not afraid to call “BS” on his fellow liberals when required, and he almost always has some element of balance to his guests, and treats them respectfully. I think it’s an entertaining and relevant format, and have enjoyed it ever since it was “Politically Incorrect” years ago on Comedy Central. Being on HBO gives it that extra little kick as well as nothing is out of bounds!

Anyway, five minutes into the podcast, I cringed in horror when I was told that his guests that evening would be Michael Moore, Paul Krugman and Elliot Spitzer. Maher usually does a good job of at least providing a little bit of ying to the typical Hollywood liberal yang, but I guess Fox News had a monopoly on guests that night. Despite my initial urge to turn off the podcast and go back to the new Pearl Jam album, I decided to stick with it. Like they say, keep your friends close, but your enemies closer.

Moore kicked off the show promoting his new movie that lays out the evils of capitalism. The irony of promoting a film about the evils of capitalism was apparently lost on Maher and Moore.

The conversation moved on to health care and Moore started ranting about the need for a governmental health care system punctuating it with the fact that “the New York Times said two-thirds of the American public want a public option.” Whether the NYT is capable of unbiased reporting on this poll remains to be seen, but let’s assume this was a scientific poll.

Herein lies the problem.

The results of a public poll allow Moore and more importantly, real politicians that matter, to bypass the difficult conversations around healthcare reform, and go straight to the populist view that “the American people want it, so we must give it to them!”

However, before we throw a trillion dollars at the problem just because “the people” want to, we need to take a look at who wants the government to continue spending vasts amounts of money and why.

The key to understanding any public opinion on public spending is to understand that, in 2009, 47% of Americans will pay zero or negative income taxes. Therefore, 47% of Americans have access to all the benefits of new government spending, without contributing a dime to the bill. It’s like the friend that is always at happy hour, but never buys a round.

Therefore, it’s immediately clear why at least 47% of the 67% quoted by the NYT want a public option, or more broadly, anything that is funded by the government. Who doesn't like free stuff? The poll question might as well been, if the government is willing to buy you a new car, would you want it? I couldn’t find the equivalent numbers for those who only pay a small % of income tax, but I’m sure that would get the 47% much closer to 67%.

Therefore, the sneaky trick of politicians is to get as few people as possible paying taxes. That way, when politicians want to expand government programs that will provide them with more job security, a huge segment of the population will automatically be in favor of those proposal because they stand to get something from the government for nothing. Once this free-riding-off-the-government merry-go-round starts, it’s very difficult, if not impossible to stop it or even slow it down, just ask Europe.

We’ll get to fixing the tax code another time…

In the meantime, if we rely on polls to draft legislation, shouldn’t the next House bill declare that every other Friday is free pizza day - all you can eat pizza, paid for by your local pizzeria owners. We could call it Populist Pizza Day. Hey, I’m sure a NYT poll would show that at least 75% of Americans would want that!

Our politicians need to start passing government spending bills only if they make sense and are fiscally sound, not just because they are popular. Unfortunately, they don’t have the guts to buck the populist sentiment because it’s much easier to run a popularity contest than it is to run the United States of America.