Banks Winning Again
By
There is a general perception that all the really smart guys in the room work in the financial services sector and all the dumb guys seem to be in Congress. Now why is that? The answer is very simple: it’s true. A member of Congress is expected to be a “jack of all trades” since members deal with subjects ranging from telecommunications, to weapons systems, finance, international trade, labor relations and every other topic one can think of so they can’t be expected to know everything about everything and are obliged to rely upon industry experts.
Another problem has to do with job security. Members of Congress are elected every two or six years depending as to weather they are in the House of Representatives or the Senate. They also tend to be “squeaky wheel” oriented in that vocal, ideological, well informed and organized constituent groups within their election districts seem to have an edge over the average “I’ve got better things to do than tell you how to do your job” resident.
How does this help the financial service companies? It plays right into their hands.
Take the issue of executive compensation, the average person in the street thinks of paychecks in the form of dollars and cents, since that’s how they get paid, but that’s not how wealth is created for today’s executive. So the public outcry over bonuses gets the center stage in the populous argument, the flames of which are fanned loud and hard by the cable news media and newspaper headlines but that’s not where the big money is, which is why it is so easy for CEO’s to work for a symbolic $1 per year or why they easily give back the bonus. The people who get hurt are employees who are working for a low base salary with the (guaranteed) promise of a bonus to make up what they should have been getting in their paychecks.
The enemy here is the once savior of the economy and mantra of the fiscal conservative: pay for performance. A great idea gone very, very, very, wrong!
Actual cash payments to senior executives is relatively meager, when looking at total compensation, which is the way the press usually reports it. Senior executives will usually receive salaries in the $750 thousand to the $1 to $2 million range with the rest of the compensation being in stock options and special bonuses (which can also be in stock) and hefty retirement plan accumulations. So the exec takes $1 a year in cash but he just had his option strike price re-set from $35 per share for the 5 million shares being reserved for him down to $5 per share. Three years from now, if the stock has recovered to $20 a share you can easily do the math on the 5 million times $15 and see why the $1 a year doesn’t mean much.
It is easy to see why any attempt to regulate senior executive pay by the government is bound to fail: there are just too many ways to get around such restrictions. The only effective way to limit pay is by action of the board’s compensation committee. Unfortunately, the committee is made up of directors recommended (chosen) by the Chairman and CEO. This leaves us with shareholders who primarily vote with their feet, if they don’t like the companies performance they sell their stock. Common stock (the stock that conveys ownership and voting rights) is not purchased by the investing public for the purpose of controlling the operations of the company but to achieve a return.
And then there is regulation. The one thing the financial services behemoths like Bank of America and Citigroup do not want to see happen is a split of Commercial Banking from Investment Banking. The ultimate horror for them would be a further split between Retail Banking and Commercial or Corporate Banking. Retail Banking has always been the cash cow of the banking system, the ultimate cheap source of funds that can be invested in other parts of the financial services company.
The biggest reason the financial services companies want to give back the TARP funds is to get out from under the lobbying rules that were one of the strings attached to the loans. They want to fight re-regulation and they can’t pump money directly into the effort while TARP money is propping up their capital. They firmly believe that if they can just survive the current crisis, they can get back on track by making a couple of “tweaks” here and there on their own and put the financial services industry back to being the personal money machine it has been for the past 20 years. Members of Congress, unfortunately, are obliged to rely very heavily on re-election campaign contributions made by industry groups and, no matter what they claim, a large contribution does get their attention and their ear.
Visionaries are tough to come by these days and changing course for behemoths is very expensive. Once a business model fails, the correction plan is usually one of patch after patch, not replacement. Autos and financial services have reached the dinosaur stage and are fighting to remain relevant on a dramatically changing world stage. The scary part is that “big” oil and “big” pharmaceutical are waiting in the wings with business models that look much too similar to financials and autos.