One Blog Closes, Another Opens

Big news, dear readers.

Today I’m bidding a bittersweet farewell to Proxyland and launching a new blog called The Big Do-Over: Fixing Financial Regulation.

Why would anyone leave Proxyland, with its lush golf courses and private runways? Well, I started this blog back in 2006 because I saw that the folks supposedly monitoring America's boardrooms and C-suites (institutional investors, regulators and the mainstream media) suffered from an acute cynicism deficiency. Since they don’t sell cynicism supplements at The Vitamin Shop, I thought I’d take my personal surplus of the stuff and dole it out here for a while. It’s turned out to be a fascinating gig, though I’m slightly disappointed that I failed to save the world.

Here in March of 2009, the Cynicism Index is moving in an inverse relationship to the Dow, our 401(k)s, and everything else that we so desperately wish would go the hell up. So there's not much point in sitting here and cracking wise about the fact that corporate governance is an oxymoron. Everyone GETS IT now, and there’s tons of good writing out there that hammers the point home, day after day.

So I'm taking the next flight out of Proxyland, though the archives will remain here for as long as Blogger.com says it’s OK.

Meanwhile, the rough beast called financial regulation, its hour come round at last, will be slouching over to The Big Do-Over. I hope you'll put on a ratty bathrobe and slouch along with us. Pretty please, with my underemployment on top? (As an enticement, I'm serving virtual donuts on the new site.)

Many of the topics I've covered here, including executive compensation and corporate governance, will pop up frequently on The Big Do-Over, since no doubt they'll be the subject of who knows how many brilliant regulatory proposals.

Here's my first post on the new blog.

Many thanks - and a zillion billion virtual stock options - to everyone who’s ever visited Proxyland!

image credit: wendyswizardofoz.com (no relation)

Stimulus Plan Attacks Executive Compensation: Stay Tuned

Everyone knows about the freaky fireball that plummeted through the Texas sky last weekend. In an unrelated development, a fireball suddenly appeared in the skies over Proxyland on Friday. That one, however, has been identified: it’s Title VII of the stimulus bill, and it’s zooming straight toward Wall Street’s compensation structure.

The administration, stunned by the amount of heat Congress packed into these compensation provisions, would like to tone them down. But as Fox News gleefully reported, Barney Frank doesn’t want to negotiate. “This is not, frankly, the Bush administration, where they're going to issue a signing statement and refuse to enforce it,” Frank said. “They will enforce it.”

It’s long been obvious that our entrenched executive compensation culture is every bit as crazy as that poor Nadya Suleman. And like Nadya, it doesn’t realize how nutty it looks to the rest of us. So you can't blame Congress for trying to put an end to the insanity. Politically, this is a no-brainer: how can elected officials - after appropriating billions in taxpayer money to save mismanaged banks - stand by and do nothing while those banks assert their inalienable right to bonuses?

This doesn’t mean the route Congress chose, which essentially bans TARP takers from paying any incentive compensation except restricted stock, is the right one, or that it will have the desired effect. (Harvard’s Lucian Bebchuk – a prominent critic of public company compensation – fretted over the bill’s structural flaws in an opinion piece in yesterday’s Wall Street Journal.)

Yes, Congress is wielding some awfully blunt instruments here, and that’s a bit scary. (It would have been fun to see them test out the “malus” approach, which could foster a much-needed multi-year approach to compensation.) Also, the legislation could fall victim to loopholes. Or, as those on the Street predict, maybe all of the “talent” will stream out the door, and it’ll turn out that we actually miss them.

But here’s the part that fascinates me. This country is on the verge of conducting a simple experiment, one the private sector would never have gotten around to on its own: Pay senior executives less, and see what happens. The truth is that no one has the faintest idea how this will work out. Maybe aliens will invade and the world will swiftly end. Or maybe, just maybe, companies will end up being better run, and good things will happen


Image source: anomalymagazine.com

Geithner's Financial Stability Plan, Or Whatever

C’mon now, everyone. Cheer up. At least Tim Geithner is easier on the eyes than Hank Paulson, whose face seemed to have the words “we’re all gonna die” written on it no matter what he was saying.

Yesterday's stock market plunge, everyone says, was about the plan’s vagueness and skimpiness and not its content. As we’ve all heard a gazillion times, the markets yearn for certainty, which the administration cluelessly dangled but didn’t deliver. Still, I wish the markets would just grow up and accept the fact that certainty, which seems to have been an illusion anyway, has packed up and moved to an undisclosed location. Somewhere in outer Brooklyn, is what I’m hearing.

There are things to like in this "not-yet-a-plan" Financial Stability Plan. While the bad bank idea presents huge practical issues – the difficulty of pricing crappy assets tops the list – I’m inclined to support it because Trillion-Dollar Meltdown author Charles Morris said something nice about it in an interview back in October. I've heard this guy speak, and if there's such a thing as a wise man, he's it. (Another thing Morris said in that interview, by the way, was this: "In the real world, this is going to be a total mess no matter how it's done. Government is a very blunt instrument.")

Also, I think Geithner genuinely understands that the government's actions need to be a lot more consistent and predictable. Under Paulson, the TARP bore an uncanny resemblance to me driving a stick shift: lurching, stalling, grinding the gears and generally frightening everyone else off the road. Transparency is crucial, too; it's encouraging that, as BailoutSleuth noted today, Geithner has begun to publish reasons why Bank X, Y or Z got TARP money.

A less encouraging thing is that a click on the webcast link posted on the new Financial Stability website brings up not Geithner’s speech, but a video of some Hank Paulson press conference from last December. Well, maybe we’re all gonna die after all.

Image source: forums.tannerworld.com

Home Is Where the TARP Is, John Mack Discovers

Word has it that Morgan Stanley wants to break up with the Treasury Department by returning all the money it got under the TARP Capital Purchase Program. Perhaps demonstrations by a housing group called NACA are helping Morgan Stanley's CEO, John Mack, fall out of love with the $10 billion he got from Hank Paulson.

Last weekend NACA protestors visited Mack's home in Rye, New York, chanting and sporting T-shirts that said, "Shame On You, CEO." Despite the fact that this slogan doesn't even rhyme - (I suggest "Yo, CEO! Your bonus must go!") - I suspect this unpleasantness will make Mr. Mack even more anxious to yank the Marie Antoinette wig off his head and give it back to Kirsten Dunst, who looked damn cute in it in that movie.

Much as Morgan Stanley would like to throw the money back at the Treasury Department like a woman hurling her engagement ring at her ex-fiance, the best Mr. Mack could muster - according to reports from a special shareholder meeting - was a lame statement that they hope to begin paying it off "as soon at it is feasible."

Goldman Sachs feels the same way. Its CFO, David Viniar, said so while speaking at a conference last week. Among the TARP features that Goldman isn't crazy about, Viniar hinted, are the executive compensation restrictions (though he termed them "minor," which they still are for most TARP recipients, despite all the fuss). When will Goldman pay back its $10 billion? "As soon as we can," said Viniar.

Let's put "as soon as we can" on a T-shirt, and then everyone can wear it when their mortgage lenders or credit card companies request a payment.

p.s.: Since I lacked the foresight to clear today's schedule for Tim Geithner's "moment in the sun," I probably won't post about it until tomorrow, by which time every other human being in North America will have blogged, tweeted, podcast or penned a haiku about the revamped bailout program. Please know that this will not discourage me.

Image source: people.com

Let Us Now Praise UBS, Home of the "Malus"

The Swiss are different from you and me. At least when it comes to their corporate culture.

About a year ago, when UBS reported what then seemed like a huge loss, I marveled that it used the word “devastating” to describe the state of its mortgage operations. It was hard to picture U.S. firms - which at that point were still blaming everything on "headwinds" - using such blunt language.

And UBS has accepted the need to reform its compensation practices, an attitude we all wish we could locate somewhere on Wall Street. So this seems like a good time to remind everyone about the executive compensation plan the bank announced back in November, which really hasn't gotten the publicity it deserves.

The UBS system - how cool is this? - now utilizes “maluses” along with bonuses. As the Times (the British one) explained last fall:

"Just as bonuses (Latin for “good”) are paid out for good performance, maluses (“bad”) will be meted out if the bank subsequently makes losses or if the employee misses performance targets, UBS said. The maluses could wipe out all previously agreed share bonuses and two thirds of all cash bonuses under stringent new rules designed to align the interests of executives and traders with those of shareholders."

A nice piece today by Ingo Walter on Forbes.com praises the malus idea. Walter points out that “in good times, the combination of the rising tide and the use of leverage often makes it impossible to tell good traders from bad ones, with most people generating decent to spectacular returns. It is in bad times that the wheat separates from the chaff. This is precisely why compensation should have a multi-year structure, with bad performances subtracting from the bonus pool in the same way that good performances add to it.”

Maluses, I'm giddily in love with you. I'm sending you Swiss chocolates for Valentine’s Day.

Image source: neuchatelchocolates.com

Executive Compensation: Real Change, Maybe, Finally?

I’ve been documenting the excesses of Proxyland for - OMG! - three years now. Yet when my son, watching CNN with genuine bewilderment, asked me how bailed-out companies could think it’s OK to buy new jets, redecorate their offices, and so forth, I didn’t know what to say.

Actually, I had an answer, but I was afraid he’d think it was lame. Maybe you will, too, but here it is.

It’s long been clear to me that Proxyland is a special place, governed by its own set of mores. To those living within its boundaries, its extravagant customs have come to seem normal and its huge payouts well-deserved. While this mindset is by no means limited to Wall Street (remember Home Depot?), it's most pronounced there.

I’m not a shrink, but I believe this is a psychological phenomenon. A very real one. You might call it mass self-serving self-delusion. (This insular mentality also fueled the subprime phenomenon, in which Wall Street hawked garbage-in-gold-out securitized products and rating agencies gave them a hearty thumbs-up.)

Now, so much taxpayer money has poured into Proxyland that its walls have been breached. Average folks, many of whom didn’t know the place existed, are poking their heads in and looking around with astonishment and disgust. As David Pitofsky and Matthew Tulchin said in an excellent law.com article this week, “the debate over executive pay has fundamentally changed from a shareholders' issue to a taxpayers' issue.”

That's a big change. Between the growing horde of torch-wielding citizens and the broad powers Tim Geithner has to restructure compensation under the TARP - should he choose to use them - it's possible real change could come to compensation practices in Proxyland. (Reports from Davos say the “bonus culture” may be on its way out elsewhere, too. )

On top of all that, Joe Biden wants to throw Wall Street bonus-payers "in the brig."

In honor of this possibility, let's revisit Beyonce's recent rendition of "At Last".


Image source: people.com

Kozlowski Writes To Thain: A Haiku

My trash can beats yours.
Cost eight hundred bucks more, man.
Gold-plated, too! Sweet.




p.s.: I've made a factual correction to this haiku. (Has that sentence ever been written before?) Press reports differ on the price of Mr. Thain's wastebasket ($1200 versus $1400), but I'm now going with the higher number. Dennis Kozlowski reportedly paid $2200 for his exceptional receptacle.


Image source: allposters.com

Stock Options Aren't Compensation, Decreed the OTS

I hope the new administration is testing the waters down there in our nation's capital. I mean that literally. I fear someone has been pumping Clueless Juice into the hallway fountains at certain federal agencies.

Check out this bizarre tidbit from the Office of Thrift Supervision, one of those financial regulators we've all come to know and love. Last Thursday the OTS revised the corporate governance guidelines that its examiners are supposed to apply when they evaluate the "safety and soundness" of OTS-regulated banks. Among other stuff, the revision removed a loony sentence about executive compensation that's been lurking in these guidelines since at least 2003. (Haven't had time yet to dig back and see when it first appeared.)

The sentence said:

“OTS does not ordinarily consider the grant or exercise of stock options as compensation unless they are sufficiently material in amount or conditioned upon factors that result in incentives that cause supervisory concerns."

How strange is that? Stock options are, and always have been, compensation. Absolutely, unequivocally, uncontroversially. (Yeah, there are some nuances from the IRS point of view, but that's not what the OTS is talking about.) This is like saying: "We don't consider Tootsie Rolls to be candy, unless you eat more than 75 in one sitting."

I guess that if a bunch of lobbyists showed up to convince me that Tootsie Rolls aren't candy, they'd make it all sound very sensible. Of course, I'm only speculating that lobbyists had something to do with this. I don't know how the hell that sentence got in there. It may have been the water.


Image source: centurynovelty.com

Sleep-Blogging Mary Schapiro's Confirmation Hearing

Having survived my live-blogging of the TARP Congressional Oversight Panel hearing yesterday, I thought I'd head over (virtually) to today's Senate Banking Committee confirmation hearing for Mary Schapiro. I will skip the Senators' opening statements and drop in when it's Ms. Schapiro's turn to talk. If she's still conscious at that point, she'll have passed her first test.

While we're waiting for the committee members to complete their oratory, let me say that I hate to be mean, but I'm not a big fan of this nomination. Since 1996, Ms Schapiro has spent most of her time running Wall Street's main "self-regulatory" organization, which in its latest permutation is called FINRA. Year after year, folks from this organization have swarmed through Wall Street firms, performing examinations, making rules and writing reports. Dunno why, but I just have a feeling they may have missed something here and there. If I were writing Ms. Schapiro's performance reviews, I don't think I'd recommend her for a big promotion.

10:38: OK, she's making her opening statement. She has a nice feminine voice, verging on breathy. I imagine this comes in handy when speaking to male Senators. Her statement, to me, is bland and boring.

Ah, Chris Dodd is asking why FINRA examiners didn't catch Madoff.

Schapiro responds: There's currently a "stovepipe" approach to regulation. Her excuse, in other words, is that FINRA had jurisdiction over Madoff's broker-dealer activities, but not his dealings as an investment adviser. (Stovepipe? A new one on me; the usual buzzword for this concept is "silo.")

Responding to a question about how everything got so screwed up, she says she warned Chairman Cox last August about an increasing "migration" of activities out of regulated entities. (Wait, is she saying it took her till August of 2008 to figure this out? Or did she mean 2007? Rather late, either way.)

10:48 am: Schapiro says credit rating agencies shouldn't be compensated by the firms whose products they rate. Not much of a shocker there.

10:51: Richard Shelby: Thinks the federal government may have to take over insurance regulation. In passing, he disses the NY State insurance department, which regulated AIG. He asks her how she'd restructure the regulatory system, saying he's not sure the Fed should be given a bigger role than it has now.

Schapiro's response: She seems to like the Fed as a systemic risk watchdog. She says it's the SEC's job to protect investors. (She's not taking the bait to bash the Fed and reach for more SEC authority. In fact, she mentions the possibility of the SEC being merged with other regulators.) On insurance, she thinks federal regulators should be involved if an institution poses systemic risk.

I don't hear any vision or novelty in her answer.

10:58: Credit rating agencies again. She suggests there should be some kind of oversight board for these guys. Or at least that's what I think she's suggesting, as she's making an analogy to FASB and PCAOB.

11:02: She wants to "take the handcuffs" off the SEC's enforcement division. She also wants to build a stronger Office of Risk Assessment. But we'll never be able to catch everything, she says.

11:07: Question about proxy access.

Schapiro responds: It's time for the U.S. to join the 40 foreign jurisdictions that already have proxy access. The devil is in the details, she says, but she's clearly signaling a change from the Cox approach. I believe the folks at union pension funds just ran out to get doughnuts. Time to celebrate!

Sorry, forgot to "time stamp" from here on in. I can't imagine you really care.

Another question (not sure which Senator is talking) about regulatory reform. Schapiro seems to say the federal government should have authority over anything that poses systemic risk. No one asks her who is going to figure out which products, activities and firms are creating systemic risk, or how we're going to get it right next time. (Judging from her earlier answer, it looks like she'd be willing to rely on the Fed for that.)

She's asked about the uptick rule and short selling. Says she'll look at all that and see if the rule should be re-instituted.

Question about "revolving door" at the SEC. Schapiro responds that she worries about people leaving the SEC to work in the industry, but she also worries about restricting this so much that no one will want to work for the agency in the first place. An eternal dilemma for federal agencies, and she doesn't suggest any specific solutions. The panel seems satisfied, though.

Ah, finally someone (Menendez?) asks her to respond to criticisms of her past performance and the idea that she is a "predictable and safe" choice but not a "robust" one. (Sorry, can't see the members' nametags, and I'm not enough of a Senate geek to recognize all the faces.)

Schapiro responds: She started her career as an enforcement attorney, and she intends to "ignite passion" in the Commission's enforcement lawyers. She calls today's WSJ's article unfair. She has been and will be aggressive, there'll be no sacred cows, etc.

Very nice, but this all misses the point. It's not just about her commitment to enforcement after the fact, but her ability to catch potential disasters before the fact. And her track record isn't so good on the latter.

Question about investor education/literacy: She wants the SEC to develop plain English explanations of stuff for investors and distribute them all over the place. (Yes! Plain English rocks.)

Dodd asks her to comment on the lawsuits over the FINRA merger. They're frivolous, she says.

OK, Mary's done. Dodd is acting charming to her kids. A lovefest.

In fact, the whole hearing has been a perfunctory lovefest. Eric Holder, eat your heart out.

Live-Blogging the Congressional Oversight Panel Hearing

I'm just sitting down to live-blog, intermittently, the hearing of the TARP Congressional Oversight Panel, or COP. This hearing is about regulatory reform, BTW, not the panel's ongoing inquiry into what on earth Hank Paulson has been up to.

This isn't my first try at live-blogging a hearing, but the soporific effect of droning Congressmen has foiled my past attempts. However, this isn't a Congressional hearing, so perhaps I can stay awake.

Chair Elizabeth Warren gave her introduction, and now the panel members are each giving statements.

9:08 am - Damn, I forgot there's a Congressman on the COP - Republican Jeb Hensarling; he's speaking now. Must try not to fall asleep. I think he's warning against an overreaction that might lead to overregulation. Thanks, Jeb, but I'm going to worry about that one later.

Damon Silvers of AFL-CIO followed, but my toast was popping up so I missed him.

9:19 am - Former Senator John Sununu just made a good point - that it's not just what regulations you have, but how those regulations operate in practice. I feel like people don't say this often enough.

9:24 am - Richard Neiman, NY State Banking Supervisor: Not much of interest. Sorry, Mr. Neiman.

Now cometh the witnesses: (here's the witness list).

9:29 am - Gene Dodaro, acting head of the GAO: Regulatory system is outdated, has gaps, etc. New products, like credit default swaps, aren't sufficiently regulated. But we must avoid "unanticipated consequences" of any changes we make. (Well, Gene, how does one take steps ahead of time to avoid unanticipated consequences? Do you see any flaw in that concept?) He notes that no one regulator is charged with looking at risks across the whole system. Yes indeedy, that's been a problem.

9:46 am - Hensarling says prosecutors are focused on terrorism and don't investigate and prosecute fraud these days unless it's earth-shaking. An interesting point - is he right, and is this an underestimated factor in the meltdown?

9:48 am - Dodaro has what I'd swear is a classic New York accent - and a face to match it - even though Wikipedia says he grew up in Pennsylvania. He really ought to be starring on Law and Order. Oops, my attention is wandering. Detailed Q&As going on about pros and cons of different federal regulatory structures, involvement of states, etc. State regulators, says Dodaro, give you "eyes and ears on the ground" so we should keep them in place.

10:05 - Second panel is seated. Warren just made a comment about having trouble with people's names and this being like a "confusing dinner party." No wonder I'm so hungry.

10:07 - Sarah Bloom, Commissioner of the Maryland Office of Financial Regulation. Her not-so-thinly-veiled message seems to be that the state regulators have been doing their jobs, but the feds have not. From her state "foxhole," she says, she's watched "classic regulatory capture" take over in Washington. Go, Sarah. Oooh, she even managed to mention Katrina and FEMA. She claims the states were on top of subprime lending and saw the flaws of the Basel capital accord (you know, that brilliant decision to let the banks calculate their own risk and decide how much capital they needed).

10:13 - Joel Seligman, President of the University of Rochester and serious securities law guru in his past life: Lays out his broad principles for a new system, including: (1) let's make a clear distinction between emergency moves and long-term restructuring, and (2) financial regulation should be comprehensive, including all products, folding in insurance companies (AIG, anyone?), credit rating firms, investment advisers. We have a "partial" regulatory system at the moment. In his new dream system, the Fed would be at the top. He also mentions "private rights of action" as being part of the regulatory structure. This means lawsuits, by those dreaded trial lawyers. Wow, I didn't expect that one, but I kind of like it.

10:19 - Robert Schiller, Yale economist: Brags that he's written 2 books about this subject, and seems to be implying "why haven't you guys read these already?" He wants to "democratize finance." Government should subsidize personal financial advice and financial education. He agrees with Elizabeth Warren's idea of a "Financial Products Safety Commission." We need to improve risk management. He wants to create "continuous workout mortgages;" i.e., in recessions the mortgage payment and principal would automatically adjust down. Good luck with that one, Bob. Have a nice drive on Utopia Parkway.

10:22 - Joseph Stiglitz, Columbia economics professor and Nobel laureate: This bailout, and past bailouts, reflect the failure of our system to meet basic requirements, like evaluating creditworthiness. In fact, America's financial system is pretty much a failure overall -- lack of transparency, flawed incentive structures that foster risky, short-term behavior. Good regulation can attract capital and encourage creativity. Derivatives should be approved by that wonderful Financial Products Safety Commission that could exist in the future. TARP has failed because there's been no regulatory reform accompanying it. We could have used $700 billion to create a new institution - huh? sounds intriguing but he's not explaining it. I kind of expected more from Nobel Prize Guy.

10:30 - Marc Summerlin, Managing Director at the Lindsey Group (who is this person? I must look him up): Fed should take a more active role in preventing bubbles and mitigating boom/bust cycles, and in fact the Federal Reserve Act says so. (I'd like to hear more about that part.) Fed has created "a bias toward overvalued assets." Buying a house with no down payment "is not home ownership; it is renting with risk." Nice point. Also, binding leverage ratios work and we should have more of them, he says.

10:37 - Peter Wallison from the American Enterprise Institute: Regulation itself introduces moral hazard, because people think the government is on top of things. There is no policy reason why the government should take responsibility for preventing business failures - let 'em fail. Regulation hasn't been working, so why have more of it? (Gee, you'd think this guy was from the American Enterprise Institute or something.) It is "a very bad idea" to empower an agency to identify "too big to fail" institutions because you end up with numerous Fannies and Freddies that have a competitive advantage over purely private firms. So what does he want to do? Require more transparency about the risks that firms are taking, and pay more attention to short selling and hedge funds.

Question period starts: Elizabeth Warren goes directly to Wallison's argument that regulation hasn't worked. She refers to the "regulatory capture" that state regulator Sarah Raskin described and asks him: isn't it really "non-regulation regulation" that has failed here?

Wallison (who still believes in oxymornons like market discipline) answers that creditors, not regulators, are the ones that can effectively "regulate," as long as there's transparency. Warren invites Raskin to respond. She says she believes regulation has worked, again praising state regulators. I hope she's right, though I'd feel better if she weren't a state regulator who fears being legislated out of existence.

Seligman comments that "effective regulation can increase confidence." But "non-regulation regulation" can undermine that confidence. (Will the oxymoron "non-regulation regulation" spread and become the new catch phrase for policy geeks?)

Hensarling, being a good Republican, apparently woke up when Wallison mentioned Fannie and Freddie; he asks for comments on the role of the GSEs. Summerlin says Fannie/Freddie had an incentive problem - they could "privatize profits and socialize losses." So the government backing made things worse, right? asks Hensarling. Yeah, I guess, says Summerlin.

Silvers from the AFL-CIO, who's been strangely quiet, asks Seligman about regulatory consolidation. Seligman talks about balancing the useful expertise of separate regulators (e.g., for securities and commodities) against the danger of regulatory arbitrage.

Silvers asks Raskin how Fannie/Freddie mortgages have performed versus purely private sector mortgages. She doesn't really answer the question.

Silvers asks Stiglitz what he thinks of the Fed as a regulator. Stiglitz says the Fed was " too easily captured in the spirit of the bubble." It must become more explicit about its mandate, and that must be to create financial stability, not just to monitor inflation. And it should be more "representative." In Sweden, he notes, labor has representation at the central bank. I'm proud of the American Enterprise guy for not immediately jumping up and calling Stiglitz a socialist just for mentioning Sweden.

Gotta go now - you're on your own.