Monday, October 06, 2008

Those Mustard Seeds in the Bailout Bill

I love this section of the bailout legislation because it sounds as if Congress is writing a cookbook:

Paragraph (2) of section 40A(d) amended by striking "and mustard seeds"... and inserting "mustard seeds, and camelina."

There's a lot to hate about what happened in Washington last week, and not just the pork. For example, people are skeptical about the legislation’s recipes for making executive compensation less yummy. And sure, it would be more fun to stick CEOs in the stocks (you know, the kind the Puritans put in public squares) and make them watch endless footage of Lou Dobbs and/or Sarah Palin.

But there’s a chance these compensation and governance provisions could end up biting some executives. Like the rest of the bill, these sections give the Treasury Secretary mucho mucho discretion. Mr. Paulson, given his Goldman roots, isn’t likely to get creative on compensation matters. But soon we'll have a new President, and almost certainly a new Secretary.

The legislation says that if a financial institution sticks Treasury with assets so crappy that “no bidding process or market prices are available” and the feds take a “meaningful” share of the firm's debt or equity, Treasury “shall require” (nothing optional here) that the institution “meet appropriate standards for executive compensation and corporate governance.”

With a little imagination, this mandate could force real change, at least at firms that are desperate to unload stinky securities. The bill lists some serious compensation and governance standards, and I don’t see anything that stops Treasury from adding others. How about by-laws mandating proxy access? Or perk policies giving executives the same cars the Shriners get?

The legislation tells the Secretary to trash compensation plans that motivate folks "to take unnecessary and excessive risks that threaten the value of the financial institution." (Again, this applies only when Treasury buys securities from the institution in a no-bid process.) do you make corporate dice-rolling less attractive? Well, you could allow only 1950s-style fixed compensation. You know, like salary?

This would be considered extreme and radical in Proxyland, but watch out, financial industry CEOs. The next Treasury Secretary could be Charlie Munger, Ben Stein or Ralph Nader. Like mustard seeds, these guys pack a nasty punch.

Image source: yakimite21

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