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September 21, 2008

Bailout equals Bankruptcy

Update: I was wrong to try to hedge the bailout with conditions. We should just say "no". see http://blog.tomevslin.com/2008/09/just-say-no.html.

Let's assume there really are toxic weapons of mass economic destruction in the portfolios of the world's banks which need to be seized before they destroy us all. I'm not there, BTW, but there's gonna be a bailout so let's think about the rules. They ought to be similar in pain to what bankruptcy would entail.

Rule #1: Cut salaries now

Part of the bailout bill ought to be that any organization which proffers securities for government purchase must agree not to pay any employee or contactor more than $1 million per year for the next four years. No cheating with trips to events on the corporate jet or other perks with draconian penalties TO THE RECIPIENT for violations.

Rule #2: No new golden parachutes

Some executives have contracts which entitle them to huge golden parachutes – especially if their pay is cut. These need to be annulled.

Rule #3: End payment on old golden parachutes

Payments on existing golden parachutes should be stopped.

But wait a minute…

How can we invalidate existing contracts? What about the rule of law? Well, let's think about it. We're told that these institutions'll go bankrupt if we don't bail them out. If they weren't – individually or in the aggregate – too big to fail, we'd let'em go bankrupt. If they went bankrupt all these employment contracts and golden parachute payments would be subject to the bankruptcy court. Golden parachuters aren't very high on the pecking order of creditors in a bankruptcy. They shouldn't be in a bailout either. Maybe the bailout needs to be accomplished under an amendment to the bankruptcy act: chapter 11A.

No company has to apply for bailouts. But it'll be interesting to see the stockholder suits against a company which refuses to get bailed out to protect executive salaries.

Speaking of shareholders:

Rule #4: No dividends for a year

This seems harsh to us shareholders who may have bank securities in our portfolio, but it's not. Clearly an organization which is being bailed out needs to conserve cash to survive.

Advantages of this plan

  1. Taxpayer money not spent on absurd salaries, preserving golden parachutes, or dividends to shareholders.
  2. Strong institutions which don't need a bailout will decide they can handle the disposal of their own toxic securities just as strong companies don't seek the protection of the bankruptcy court.

And BTW

Same rules for auto companies or anyone else with their hand out for a hand out.

More on executive compensation and especially Treasury Secretary Paulson's stand AGAINST reducing it here.

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