Chris Dodd: Final Nail Driver?
Here is yet another tidbit to add to the mountain of evidence that the recently passed stimulus is a disaster for America's economic competitiveness. Obama seems to be opposed to these compensation limits, but let's be honest, who can really tell since it is becoming clear that he doesn't really have much in the way of a strong, principled stance on anything. I am not going to give the standard economic defense of freedom to contract for labor. That is surely made more eloquently and cogently elsewhere. I am however going to point out the two most obvious direct consequences of these compensation limits. Let's analysze with respect to banks.
1) There are a handful of large troubled banks. At least to some extent, these banks got large and stayed large through smart management along the way. Any large bank is a multi-faceted operation with strong components and weak spots. As we saw with AIG, one weak spot can sink the entire operation and ruin life for the smart managers in the good parts of the company. So if you are the management team at a profitable and healthy unit within, say, Citibank, you are gonna chafe at the new compensation restrictions. Why should you suffer, when you didn't sink the company and your division may be one of a handful of divisions that are keeping Citi alive? There is always some other bank that would want to get in on heathy business like yours, and if Citi can't pay you what they've been paying you because the government says so, some other bank gladly will. So, let's pretend a healthy bank, say US Bank, lures you over to run a new division to compete with Citi - its you and your highly motivated team against the pay-limited folks at Citi. Whose gonna win in the marketplace? You are, and Citi will fall further into the abyss. Thank you Chris Dodd (and President Obama for going along).
2) Same deal, except that you needn't rely on the presence of a healthy, acquisitive bank to come along. Citi is paying you what they are today presumably because they feel you are worth it. Government restrictions don't change what they want to pay you, just what they can. So you work out a deal, Citi pays you exactly what they currently do, but they don't do so in an employer-employee relationship. You hive off into Joe Divisionhead LLC and Citi contracts with you to outsource the management of its business to you. Now Citi is the client and you are the outsourced provider. Voila. Government restriction avoided. Although there is a dead-weight loss imposed since the formal transition needed to redefine the relationship will occasion lawyers' fees and management time, etc.
Neither of these outcomes is necessarily optimal, but they may be the most rational response to the new government-imposed reality. This policy could be the final nail in the coffin of such firms as Citi, General Motors and handful of others. Stay tuned.
1) There are a handful of large troubled banks. At least to some extent, these banks got large and stayed large through smart management along the way. Any large bank is a multi-faceted operation with strong components and weak spots. As we saw with AIG, one weak spot can sink the entire operation and ruin life for the smart managers in the good parts of the company. So if you are the management team at a profitable and healthy unit within, say, Citibank, you are gonna chafe at the new compensation restrictions. Why should you suffer, when you didn't sink the company and your division may be one of a handful of divisions that are keeping Citi alive? There is always some other bank that would want to get in on heathy business like yours, and if Citi can't pay you what they've been paying you because the government says so, some other bank gladly will. So, let's pretend a healthy bank, say US Bank, lures you over to run a new division to compete with Citi - its you and your highly motivated team against the pay-limited folks at Citi. Whose gonna win in the marketplace? You are, and Citi will fall further into the abyss. Thank you Chris Dodd (and President Obama for going along).
2) Same deal, except that you needn't rely on the presence of a healthy, acquisitive bank to come along. Citi is paying you what they are today presumably because they feel you are worth it. Government restrictions don't change what they want to pay you, just what they can. So you work out a deal, Citi pays you exactly what they currently do, but they don't do so in an employer-employee relationship. You hive off into Joe Divisionhead LLC and Citi contracts with you to outsource the management of its business to you. Now Citi is the client and you are the outsourced provider. Voila. Government restriction avoided. Although there is a dead-weight loss imposed since the formal transition needed to redefine the relationship will occasion lawyers' fees and management time, etc.
Neither of these outcomes is necessarily optimal, but they may be the most rational response to the new government-imposed reality. This policy could be the final nail in the coffin of such firms as Citi, General Motors and handful of others. Stay tuned.
posted by Donny Baseball at 10:38 AM
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