About Tom Evslin

Video Profile of Tom Evslin

Follow Tom Evslin on Twitter


subscribe:

Add to Technorati Favorites!
Powered by TypePad
Member since 01/2005

technorati


« Now For the Good News… | Main | Capping Executive Salaries in the Bailout »

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.

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d83451cce569e2010534c0893d970c

Listed below are links to weblogs that reference Bailout equals Bankruptcy:

Comments

Harris-Courage & Grady

The issue is if we simply hand people money it does nothing to deter bad business decisions ... in fact if anything it only reinforces poor business practices. Requiring business to use bankruptcy protects them for a period of time but this time is then used to give them the opportunity to focus on business improvement and growth ... throwing money at a problem rarely if ever works. And worst of all its not the businesses that will be footing the bill ... its the public.

Vicente - CA Foreclosure Laws

I'm going to repeat what everyone else is saying because it is worth repeating. What kind of nation will we become when we don't let people pay for the mistakes they have made? What will we become if we reward those mistakes over and over again? Yes, the bailouts were basically rewarding them for screwing up. If I lose all my money on roulette will I be rewarded for not paying my mortgage? No, I'll lose my house and will pay for my mistake of gambling all my money. I will never forget this and I hope neither will history.

Kevin - Seattle Bankruptcy Attorney Associate

You know what really ticks me off? Banks are not returning the favor and bailing out their customers, and it's hurting everybody. Homeowners are forced to file for bankruptcy due to lender's refusing debt forgiveness on their short sales, 2nd loans, etc. The end result? Homeowners are discharging their debts via bankruptcy and nobody is getting paid. Apparently the small minority of homeowners who are coerced into paying their payments makes it worthwhile..

Mike Harrison

Almost two years later since this was was posted. Interesting to see what has happened. We spent Trillions of $$ and there is no real evidence that we are better off for spending that money. I think for now that the spending will slow down or we will face bankruptcy as a nation.

The good news is most of the banks have already paid back the bailout money. I wonder if history will tell us that we did the right thing with all this spending.

bailoutgame

I love this list. You should run for a government seat. There is alot more sense here than 90% of our politicians have.

immo kantoren

I think Bankruptcy and bailout appears to be the two sides of the same coin. However I think it depends upon the current financial state and requirements of a given company to figure-out the need for bailout at the time of expected bankruptcy. The painful contents of bailout option can not be avoided,however may be reduced by reconstruction of new financial system of a company for better future bussiness.

MaryW

Reply to gg:

These rules are for the execs of failed companies. Why reward failure? "you strive and you succeed remember that". Where is the success here? They have succeeded in getting a hand out on the back of hard working americans who are striving to succeed and are being kicked in the mouth by the college educated business graduates who are on the rungs above. If I fail who is going to give me a hand up let alone a bail out.

gg

Just want to say that whoever is in favor of executive pay cuts in this forum is BROKE with a day to day job because any ambitious individual that goes to college bust their butt in school to be able to work in a high paying career would not want CEO salries cut. What type of aspirations can that give a student or a top performer its like saying Hey work your butt off but where capping you at this amount. I mean its rediculous but every wants to say that it was there greed that got us into to this well what about everyone that made money through the housing market those people that took a $90k house and sold it for $300k thats not greed i think so what we have to give back some stop being a cry baby.
Once the bill gets introduce market confidence gets restored asset value will go up and firms can unload some debit we might even need to use the money just by the goverment passing the bill markets will react and people will think its save to buy some banks wont even need to participate. What is wrong with you people wake up you want to cap the American dream "you strive and you succeed remember that".

Ryan Graves

I love the rules stated here. However, I see it as idealistic. Who will enforce these rules??!!

Andy Freeman

ML sold its mortgage portfolio for $0.22 on the dollar.

How many of you would have been thrilled to get in on that for $0.25-30?

We're not going to see 50% forclosure rates. Even if we do, we're not going to see housing prices drop by 70%.

The problem was that the "market" for these securities was too restrictive. If I'm not "qualified" to buy something for my own benefit, I shouldn't be required to pay for it for someone else's.

Instead of using public money, auction these puppies in public to anyone with the cash. (Talk about a boost to 401(k) returns.)

Pat

@Chris ---

Bankruptcy usually isn't a voluntary action. I would think that the creditors would force the firm to accept the bailout.

Also the Federal/State governments should be more willing to revoking business licenses.

Pat

@Ron -- 'Capping salaries and ending golden parachutes will only further throw these firms into turmoil as their "best" and highest-paid employees leave to unaffected firms, regardless of their role in this mess.' ....

I like the way you quoted "best" ... you are right we wouldn't want the "best" to leave because then they would screw up other firms!

But seriously, if they were really so good .. how come their firm is going belly-up?

Pat

$1million? That's a joke. How about a still very good salary of $200K? So what if they have to sell their Aspen condo and their Martha Vineyard bungalow!

Also:

* all stock options are canceled and any vesting cliffs are reset for anyone at the Director-level or higher.

* All pensions for Director or above level are canceled.

* All deferred salaries are canceled

* All bonuses for previous 3 years are required to be returned.

* Any person above Director-level may not be on any outside boards for the next 4 years.

* Vacations are limited to 2 weeks for any director-level or better.

BTW ... I list out all of these because I am so, so, so tired of corporate welfare. The chickens really need to come home to the proper roost.

alan p

I still think any bailouts should be run through the Chapter 11 process, it is a simple mechanism for sorting all this stuff out - it also reveals the true price of the assets, ensuring the state does not overpay. The way it is structured now just risks the state underwriting the existing behaviours.

I can't imagine any other company bailout that would keep the people who made the mess in situ and what's more, reward them for it from the funds supplied to bail it out. That of course is because in those cases, the funds belong to the bailers.

Andy Swan

What exactly is the point of keeping everyone who is worth more than $1m/year out of this industry?

Are we really this naive and vengeful to cut off the main incentive for quality people...when the entire industry is seeing a massive talent drain due to the reckless mistakes of a few?

Tom Evslin

Rob and Simon:

If it were just a single firm being bailed out, you're right that the rule against high comp would make its most soughafter people leave. They might not be the best but we'll leave that for now.

If most of an industry is being bailed out, however, then there aren't jobs for the wouldbe highpaid to go to. Right now I think there are more bankers than jobs. Even the strong banks have had layoffs and so won't hire the people from the weak banks in great numbers.

The eventual reward for even "low-paid" people who save a bailed out bank is the chance to build a reputation that'll serve them well later.

The alternative is to believe we have to subsidize outrageous salries in order to have a banking system.

Rob Lindberg

I like the spirit of all of these ideas. However, they can only work in a vacuum.

Capping salaries and ending golden parachutes will only further throw these firms into turmoil as their "best" and highest-paid employees leave to unaffected firms, regardless of their role in this mess.

Simon Brocklehurst

Some good ideas there. No need to worry about the law - governments *make* law, so, in a democracy, they can do what they want, as long as the general population supports the new law. A couple of points though:

- To be effective, these kind of rules have to be implemented globally by different national governments. If this doesn't happen, people can (and will) get paid in different countries (and perhaps move to different countries) to by-pass local laws and regulations etc. Not easy to get that kind of international co-operation.

- Second, it's important to be accurate and precise about the source of the problems, and go after the individuals involved. In this case, the problems were largely caused by the personal greed of individuals who deliberately mis-priced, and misrepresented complex securities for short-term personal gain. Governments should go after these individuals and simply take all the money from their bank accounts, and seize their assets. Call it a retrospective windfall tax, perhaps. These people caused the problems, so they should pay more dearly than the average tax payer towards solving the problem.

Tom Evslin

Elon:

I agree that huge payments to middlemen have actually long been a drag on the "real" economy. In fact I think executive salaries have been an excessive burden even in other industries.

Making sure "bankrupt" banks don't contunue to make overpayments for past disservices is only a partial solution.Probably we can't right all past wrongs.

But how do we make the future better? Wish I knew.

Thanks for commenting.

Elon Ganor

Tom Hi
Great idea indeed, but wy draw the line on current and future and not on past? it is obvious that sick greed brought us here by a bunch of middleman..(Yes the whole Wall Street industry is after all middleman between the industries needing money to the masses that have it (Pension funds and such) or rich individuals and families..and they (Wall Street) were closest to the Huge amount of money there was no end t o their appetite..Now we are all paying the price of tat greed backwards.. it is obvious that also without your plan salaries will now go down and bonuses as well.. biut what with those that took hundreds of millions of dollars annually? I am not and never been a socialist and do believe in capitalism , yet I never understood why a high level executive in Wall Street has to take home so much more then a family doctor...is it the amount of work he invest? is he smarter? what is it? I truly do not understand? and yes I have no answer of how the system shoudl work. One thing I am sure...it is the money hat was spilled.. tha tyou should go after...

Tom Evslin

Chris:

I think in this case the plaintiff bar has a healthy role to play. It's a made to order stockholder suit if officers grossly neglect their fiduciary duty in order to preserve their perks.

It's also likely that the big stockholders - pension funds etc. - might really get off their duffs to protect their assets in this case.

Thanks for the comment.

Chris Yeh

Great suggestions, Tom. It really fits in with my concept of the miserly safety net; offer help, but on such onerous terms that only the truly needy would accept it.

My question is, what about the agency/ownership problem? What happens if the management of a company refuses to take a bailout because of the personal consequences for their compensation?

Not suggesting this is a good reason to avoid a rational bailout, just curious if smarter minds than mine can solve the problem.

Post a comment

If you have a TypeKey or TypePad account, please Sign In.

Now on Kindle!

hackoff.com: An historic murder mystery set in the Internet bubble and rubble

CEO Tom Evslin's insider account of the Internet bubble and its aftermath. "This novel is a surveillance video of the seeds of the current economic collapse."

The Interpreter's Tale

Hacker Dom Montain is in Barcelona in Evslin's Kindle-edition long short story. Why? and why are the pickpockets stealing mobile phones?

Need A Kindle?

Kindle: Amazon's Wireless Reading Device

Not quite as good as a real book IMHO but a lot lighter than a trip worth of books. Also better than a cell phone for mobile web access - and that's free!

Recent Reads - Click title to order from Amazon


Google

  • adlinks
  • adsense