The Reticulator

In olden times, if you got too far in debt to pay back your loan, you would get thrown in prison and would not be let out until you paid the uttermost farthing. Of course, it was difficult to generate enough income to come up with those farthings while you were in prison.

To some people this system seemed counterproductive if not unjust. It motivated them to come up with a better method, such as bankruptcy court.

But now the Obama administration is taking us back to the older ways.

According to Monday’s WSJ, Citigroup and Wells Fargo would like to get out of the Trouble Asset Relief Program. They have money to pay back the taxpayer money that had been loaned to them. But the government likes having those companies in its debt. In this case the uttermost farthing consists of about $20 billion more than they even owed. The government won’t let them pay back the money unless they also raise $20 billion in common stock. Of course, it’s hard to raise that kind of money while you’re in prison. Who wants to invest in Citigroup and Wells Fargo when they’re operating under the government’s thumb? So, as the article says, “Disagreements over capital-raising mean Citigroup is unlikely to repay its TARP investment in the foreseeable future….”

I presume it’s not a surprise to anyone that Bank of America is having some difficulties in getting its preferred candidate to take the CEO job, given that any compensation package is subject to review by President Obama’s czar-operative, Kenneth Feinberg. [URL]

The scary part is that they will find someone to take it. They might even find someone who is adequate enough to do the job. But it will be someone who is politically compromised, and/or willing to become politically compromised. Sort of like we’ve seen with General Motors.

This is too weird to take at face value. Obama wants to control compensation policies at banks to prevent those employees from taking too much risk. I don’t for one minute believe it.

Here’s the way the WSJ describes the Obama administration’s plan:

Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions.

The Fed’s plan would, for the first time, inject government regulators deep into compensation decisions traditionally reserved for the banks’ corporate boards and executives.

Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees — from chief executives, to traders, to loan officers — to take too much risk.

For one thing, risk isn’t something that’s necessarily bad. There are good risks and there are bad risks. It’s hard to tell upfront which are which, which is why they’re called risks. The government itself encourages risky banking when it backs up student loans or housing loans. Sometimes we might consider it good for a bank to take on a risky borrower that other won’t touch. On the other hand, we might not want banks risking all their reserve capital to make risky investments.

If there are certain risks that we don’t want banks to take, the way to do that is to prohibit the behavior, not go about it by such an indirect means as employee compensation.

What if we approached safety regulation the way Obama wants to regulate banks. What if we said that instead of enacting safety standards, we’re going to review compensation policies to make sure businesses don’t reward employees who create unsafe workplaces or produce unsafe products? That’s going to give regulators a lot of work to do, but safety isn’t going to be the outcome. For one thing, it doesn’t even define what sort of safety the law requires.

Obama and his crowd may not be the brightest kids on the block, but I don’t think they’re so dumb as to think that’s the way to accomplish what they say they want to accomplish. Being a skeptical, cynical person, I suspect two things are going on here.

1. The Obamanites have no idea how to regulate bad banking behavior without undermining their own party’s programs that are designed to encourage bad banking behavior.

2. Obamanites don’t like people making their own decisions. People who do that are a threat to the role they envision for government.

So naturally, the thing to do is to take decision-making power out of people’s hands and turn it over to the government.