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.

Paulson Wimps Out On Executive Pay

Last week I praised Mr. Paulson for attacking one obvious flaw in the bailout bill's executive compensation limits: the Stan O'Neal Memorial Loophole, in which you fire a guy but pretend he left for some other reason so he can keep his golden parachute.

Does this mean I’m loving the way Treasury is carrying out Congress's orders to crack down on excessive compensation at bailed-out banks?

Heavens, no.

First of all, Mr. Paulson is doing the bare minimum the law requires, although he has broad powers to set "appropriate" compensation standards. I can promise you that if I'm appointed Treasury Secretary, I’ll have a lot more fun with this authority.

And in an act of extreme naivete, or extreme cynicism, the current Secretary is putting his trust in the firms’ own compensation committees, those souls of generosity who helped bring about this enjoyable economic moment.

One of the most useful tools in the bill - potentially - is Congress's directive to get rid of compensation plans that could inspire executives at bailed-out firms to take "unnecessary and excessive risks.” But Mr. Paulson has merely delegated this job to each firm's compensation committee, with a few vague instructions. For example, he tells the committees to meet with senior risk officers - once a year - to contemplate the “relationship” between compensation and risk management. Once a year? I'm choking on my gummi bears here, and it's really hard to choke on those things.

And Mr. Paulson’s compensation rules cover only the CEO, CFO and the next 3 highest paid officers. This crazily leaves out many of the traders who got us into this mess, and the ones who'll probably get us into the next one.

Also, as Carl Icahn pointed out on his blog, the golden parachute ban doesn’t kick in unless a severance package adds up to triple an executive’s annual pay. So a bailed-out CEO who’s been averaging $10 million in salary and bonus for the last five years could still get fired for incompetence and head off to Golfland with $29 million in severance.

I suspect boards won’t take advantage of that particular loophole in the immediate future, as they won't want to risk the slings and arrows of Andrew Cuomo and Henry Waxman. But, jeez, Hank, this is no time to be such a wuss. Get out there and have some fun.

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)...is 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.) Hmm...how 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

Bailout Bill Dumps Proxy Access

I wasn't sure we really needed the bailout until I heard that Mr. Paulson got down on his knees and begged. I guess they'll have to put moveable joints in his action figure now.

After hearing that shocker - and a few harrowing tales from folks who work on the street formerly known as Wall - I slinked over to my bank and took out extra cash. I'm worried that if the global financial system crashes, everyone will point the finger at me and my $300 ATM withdrawal, although I plan to blame that bald guy behind me in line.

I see, per the draft bill, that the Democrats have dropped their attempt to stick in proxy access, something that floated by in a draft of the legislation earlier this week. I can't blame them for trying; after all, opponents of proxy access have argued that it would destroy the foundations of capitalism, but that seems rather a moot point.

The august body that is to monitor Treasury's shopping spree will, it appears, be called the Financial Stability Oversight Board. OK, everyone on the House Acronym Committee should be voted out in November. I don't know whether to cry or curse.

p.s: Just saw this 60 Minutes piece in which Paulson and Pelosi claim the kneeling was all in fun, just a way to lighten a tense moment. Guys? Next time use a whoopie cushion.

Image Source: Corbis

Attention MBS Shoppers!

Gosh, I sure hope the bailout happens, because Warren Buffett says it'll be lots of fun. “I would love to have 700-billion at Treasury rates to be able to buy fixed-income securities now that they're in distress," he said. "There's a lot of money to be made.”

Yes, he actually used the word “love,” and then gushed enviously: "If I could borrow 700 billion on the government's terms and buy these assets I'd be doing it myself. But unfortunately I'm tapped out.”

Aw, Warren, don't feel bad. When I get my new CDOs, I'll be happy to trade them to you for some Berkshire Hathaway stock.

Having fought off the cynical thought that Mr. Buffett is playing Tom Sawyer and you and I will soon be whitewashing a fence somewhere in Omaha, I'm eager to start shopping at MBS-Mart! But that still leaves the pesky issue of how much Mr. Paulson should pay at the checkout counter.

Mr. Buffett weighed in on that one, too: ”I basically like a market, or something very close to a market-related price. And there are ways to determine that and I don't think that Uncle Sam should be in the business of paying somebody a whole lot more than it's worth in the market today.”

But what will happen to market prices when the market notices a 700 billion-pound gorilla lurching around with cash hanging out of its pockets, mumbling something about hold-to-maturity values? Perhaps, with this bailout plan, we have met the market and it is us.

*****

Some not-so-bad news: According to my friends at the witty-yet-eggheady Liscio Report, we can sort of afford this bailout.

Some not-so-good news: I just remembered this post I did for footnoted a couple of months ago about Wall Street valuations.

Image source: Unfocused Content

Pay It Backward, Paulson

Dropping by the Senate Banking Committee this morning, Hank Paulson pointed his bony Ghost of Christmas Future finger at both "bad lending practices by banks" and "borrowers taking out mortgages they couldn’t afford."

Fascinating, how the current woes of Wall Street megatitans are linked to low-income borrowers at the opposite end of the socioeconomic spectrum. It's like a hokey movie where, through some improbable plot device, two people who can't stand each other get handcuffed back-to-back and must work together to escape.

Here’s a suggestion, Congress. Don't try to put limits on Wall Street compensation; there's no time to structure them properly, and lawyers and consultants will just loophole their way out. Instead, claw back some of the millions Wall Street CEOs earned over the past few years and use them to backstop mortgage payments for those who face foreclosure.

Under my French Revolution Plan, everyone wins. Folks will keep their homes, and with mortgage payments assured, the market for mortgage-related junk should become more liquid. The credit markets will thaw, the stock market will rise. The election will go back to being a silly spat about - what was it, bitter lipstick? Even my hair will cooperate. What a lovely dream.

Sure, I'm advocating a pure redistribution of wealth. Sure, it’s socialism. But so is Prime Minister Paulson’s plan. The time has come for extreme and dangerous action, whether it's a size XXXL government bailout that might or might not work, or women sporting jumpsuits in public.

Big and Fuzzy Fannie and Freddie

So I woke up on this beautiful day and decided to post on the GSE bailout, even though it’s already inspired so much commentary that one could read for the collective lifetimes of the Presidential/VP candidates’ children (that's 12 kids for the McCain-Palin ticket alone) and still not get through it all.

The federal government’s "implied guarantee” of Fannie and Freddie has turned out to be one stupendously expensive oxymoron.

At a 2004 Senate Banking Committee hearing, a law professor guy (and former assistant something-or-other in the Clinton Treasury Department) said it quite nicely:

The GSEs play an extraordinarily successful double game. They emphatically deny that they have any formal, legally enforceable government backing... At the same time, they work to reinforce the market perception of implicit government backing. In effect, the GSEs tell Congress and the news media, ‘Don’t worry, the government is not on the hook’ -- and then turn around and tell Wall Street, ‘Don’t worry, the government really is on the hook.

As of the past weekend, the game is up. The winner? China. Might as well get used to that, I suppose.

Soup of the Day

Treasury Secretary Paulson's fun-filled Blueprint for a Modernized Regulatory Structure proposes an “optimal” regulatory system that would populate the world with its offspring: FIDIs, PFRA, CBRA, FFSPs, and so forth. As the debate over financial services regulation drags on, everyone now gets to toss around these new acronyms along with the many already in use, thus congealing our so-called regulatory alphabet soup into a big old soggy pasta salad.

Major regulatory overhaul being the stuff of distant dreams, the only new agency Paulson might be serious about creating is the MOC (Mortgage Origination Commission), listed as one of the Blueprint’s “short-term” goals. Through the MOC, federal officials would oversee state licensing and regulation of folks involved in the mortgage origination process. Which inspires me to propose the following acronym: HINFAIFWWTODIIOTSD, or Hey, Inventing New Federal Agencies is Fun When We’re the Ones Doing It Instead of Those Silly Democrats.

It’s odd to see this free market-loving administration dream up a new agency to regulate behavior that “market discipline” (normally an oxymoron here) may belatedly curb on its own. After all, Wall Street is facing the true risks of securitizing crappy loans, rating agencies are unlikely to bestow happy ratings on crappy mortgage-backed securities, bond insurers can longer backstop this crap, and once-beguiled MBS buyers are ready to beat the crap out of everyone involved.

So won't it be pretty tough for rotten mortgages to find shiny new securitized products they can crawl into and contaminate? And, finding themselves unwanted, might these substandard loans not just slither away and leave us all alone?

Gosh, it’s not like me to be so optimistic. Especially on a day when Reuters cheerily reported that UBS's $19 billion subprime-related writedown had spurred a “writedown relief rally” on the FTSE, and this wasn’t an April Fool’s spoof.

A Few Dollars More

This was supposed to be one of those interactive web polls, but I ran into a technological issue. So please just vote silently to yourselves.

JP Morgan’s decision to raise its Bear Stearns bid from 2 bucks to 10 bucks is best described as:

(a) A victory for Bear shareholders and the awesome power of Delaware corporate law.

(b) An embarrassment for Ben “BB Gun” Bernanke and his fellow dealmakers at the Fed.

(c) A once-in-a-lifetime opportunity for major newspapers to use the word “quintuple” in a headline.

(d) The only way for Jamie Dimon to get a do-over on the documentation and fix the whopping error made by a nameless Wachtell, Lipton attorney who apparently lacked the correct prescription drugs to bear down all night on the Guaranty Agreement.

That is, if it really was an error.

(e) All of the above.

(f) This is stupid. Please go away. (Which is, coincidentally, the same thing Bear employees told Mr. Dimon, but he didn't, and neither will I.)

Seeking Liquidity

I think we’re all learning a lot from the Bear Stearns (BSC) thing. Sorry, I know writers are supposed to avoid vague words like "thing," but Fed Chairman Bernanke hates the term "bailout" and I don’t want to increase the poor guy's stress level. So even though Jamie Dimon is slotted to get the Manhattan skyscraper while we taxpayers effectively acquire a basement full of illiquid mortgage-backed securities, I will steer clear of the B-word and just call it a thing instead. Thingy, if you prefer.

Here’s what I myself have learned so far. First, I've learned that, according to the Fed, the Bear deal isn’t a thingy if JP Morgan (JPM) pays 2 bucks a share for stock that recently traded at 67, but it might be a thingy if it pays 10. And even more importantly, I’ve found out that folks at well-paid legal powerhouse Wachtell, Lipton can make mistakes-- like the one in the JPMorgan/Bear merger agreement (thank you, New York Times) that says JPM will stand behind Bear’s trades even if shareholders reject the deal. Not to mention someone spelled the word "dependent" with an "ant," which always bugs me.

There’s another clause in the merger agreement that kind of jumped out at me. (Yes, I confess to actually sort of reading the document, but I was watching The Simpsons at the same time so it doesn't count.) I’m talking about the sentence that says JPM will "honor" all of Bear’s employment agreements, change in control agreements and deferred compensation plans. According to Bear’s last proxy, the only CIC arrangements its officers have are equity-linked, and therefore perhaps nothing to get excited about. Still, the promise to love, honor and obey Bear's CIC deals made it into the contract, and covers any commitments to Bear employees or officers, "written or unwritten." So we citizens of Bailout Nation (damn, that just slipped out) may want to keep an eye on who at Bear walks out with what, just in case.

Back in 2006, the Wall Street Journal reported that some were referring to Mr. Bernanke as "Bearnanke" because of his views on the bond market. The label didn’t stick at the time, though it may now, for a different reason.

I say the hardworking Chairman deserves a nickname that’s more fun, some kind of fratboy moniker completely incongruous with his beard-sporting appearance and somber demeanor. So best of luck with the Bear thing, "BB Gun." The next beer I chug will be for you.

Logical Choices

I’ve been lackadaisically browsing the testimony from Friday's executive compensation hearings just in case California Congressman Henry Waxman unearthed anything that we in the left-wing antibusiness press (bugbear of Countrywide CEO Angelo Mozilo) didn’t already know about. BTW, you can’t imagine how excited I am to be part of a vast pinko conspiracy I didn’t realize existed; I suddenly feel like a heroine in some pious movie about the McCarthy hearings who's played by Hilary Swank, or maybe Charlize Theron in one of her uglified star turns, and gets to face down Senator Joe and even take the Fifth.

It was fun to read Mozilo’s inexplicably illegible e-mails, especially the one where he complained that the chintzy bastards at Countrywide had picked up his wife’s travel expenses but were expecting him to pay his own taxes on that perk. But this mode of thinking, which you might call Mozilogic, is nothing new.

For example, years ago I worked with a senior executive who made a rare foray from his C-suite office up to the humble accounting floor to address an urgent perk-related matter. You see, he'd driven his own car to a company golf outing where he’d played 18 holes with some clients, followed by drinks and dinner, then returned to the club parking lot to find that tree sap had dripped on his hood. This, he asserted, necessitated the intervention of an auto care professional. (In keeping with my newfound radical identity, I’m now pretending I drive a dusty VW bus, so don't ask me to opine on the fine points of sedan sap removal.) Being an early adopter of Mozilogic, this exec demanded that the company pick up his sap cleaning costs. I actually think someone found the courage to tell him no, but perhaps I’m just remembering the incident with a kind of slo-mo, Vaseline-on-the-camera-lens nostalgia.

This whole reminiscence has also triggered in me a slo-mo, Vaseline-on-the-camera-lens nostalgia for this post I wrote over a year ago, long before Countrywide became a mascot for the subprime crisis. At that time, I noted Mr. Mozilo’s presence on the Home Depot compensation committee, which had handed over $210 million in severance to resigning CEO Bob Nardelli. But if you believe Mozilogic played a role in the Nardelli story, you're obviously utilizing Leftwingloonybinlogic.

You Rock, IRS

Thanks to Hillary Clinton, we all know who gave Barack Obama sound bites for his speeches. But what genius has been feeding lines to folks at the SEC? Last week an SEC official devoted an entire speech – in Australia*, no less – to a strained analogy between the 1962 western, The Man Who Shot Liberty Valance, and...I don’t know, something or other.

SEC Commissioner Kathleen Casey also waxed clumsily metaphorical recently. Speaking at a conference, she commented that when Congress has tried to use tax laws to tamp down executive compensation, compensation has simply “shifted” elsewhere “like a rock on jello.” (I keep wondering if she meant to say "jello on a rock." Would a rock on jello really shift? Wouldn't you need a whole lot of jello and a really small rock? Anyone out there looking for science project ideas?)

Commissioner Casey may soon be eating her words. The very day she delivered that speech, the IRS threw Proxyland (the place, not the blog) into a tizzy by deciding to re-interpret a section of the Internal Revenue Code that’s been sitting around, not doing terribly much, since Bill Clinton signed it into law in 1993. I’m talking, of course, about the famous Section 162(m), which says you can only deduct a paltry $1M per year for a top executive’s compensation, unless (nice big exception here) it's completely "performance-based.”

Last week, backing up a less formal ruling it issued in late January, the IRS officially confirmed its new tough guy position, which basically says: If an executive's contract calls for bonuses tied to performance, but also guarantees him freebie bonuses to be paid out as severance if things don't work out - no matter how he's performed - then the bonus program isn't entirely performance-based. So, sorry, no tax deductions. Did that make any sense? The tax code is no fun to blog about.

Even though the IRS was nice enough to grandfather all existing contracts, the immediate result of this ruling will be that law firms will reap their own "performance-based compensation" for re-writing massive numbers of bigshot employment agreements. One firm even suggests that “most companies will want to eliminate these termination and retirement accelerations from their plans and agreements.” If that’s right, there's a chance that Commissioner Casey, and others who don’t believe in the power of legislation to affect executive compensation in a meaningful way, could be wrong.

If this tax ruling inspires companies to hand out severance payments in a less carefree manner, I'll have one less thing to complain about here. In which case I'll have to find my lab partner, get out my rock and my jello, and figure out how to shift my cranky attention to something else.
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*Coincidentally, this very blog just made news in the Land Down Under.

House Whine

There ought to be a website called BoreYouTube, reserved for items like this video of the hearings held last week by Congressman Henry Waxman to explore conflicts of interest in the world of executive compensation consulting. Having made it through the opening statements before dozing off, we remain convinced this is a non-scandal -- not because we believe the Towers Perrins of the world are truly objective, but because the term “independent compensation consultant” has long been on Proxyland's oxymoron list.

As we’ve argued here before, the parallel Mr. Waxman draws between independent compensation consultants and independent auditors is rather weak, in the absence of some regime that makes consultants legally accountable to shareholders, the SEC, or anyone else. Also, companies don't have to use compensation consultants, which makes these folks less like auditors and more like hair stylists, hired to make their clients look and feel good. (The hair stylist bit is our attempt to avoid repeating our friend Charles Munger’s comparison of compensation consultants to a different service profession.)

The Waxman Theory – that consultants who perform other lucrative jobs for the CEO won't give objective compensation advice – makes sense, but we believe Mr. Waxman is digging into a side dish while neglecting the main course. Consultants’ conflicts, like mashed potatoes, are easy to munch on, but Waxman should grab his knife and saw into the gristly steak of director independence. (If we had an editor, he or she would surely have axed this lame metaphor, but we’re sticking with it.)

If the directors who make up compensation committees truly had an independent mindset, they would (1) make absolutely clear to consultants that independent directors, not management, are the boss of them (2) insist consultants be paid only from a separate and generous compensation committee budget, and (3) employ a network of secret caddy-informants in case the CEO tries to tee off with anyone from the consulting firm.

Loading proxy statements with disclosure about compensation consultant conflicts would merely assign to investors another watchdog job that directors ought to be doing themselves. And we all have better things to do, like finally getting around to watching the famous “I Feel Pretty” video that shows a lovefest among John Edwards, his hair stylist, and his hair.

Housecleaning

So the House Committee on Oversight and Government Reform - chaired by energetic Democrat Henry Waxman - is looking into “conflicts of interest” at big executive pay consulting firms like Hewitt, Mercer, and Towers Perrin. The Committee is asking what other work these guys do for their corporate clients, on the theory that side gigs may interfere with a consultant's independence.

Mr. Waxman is flashing back to the issue of accounting firm conflicts of interest. Sorry, Henry, this is different. Auditors, those poor slobs, are clearly charged with a public duty. Long before accounting firm conflicts were supposedly stamped out by the sweaty foot of SOX, the Supreme Court said that “the independent auditor assumes a public responsibility transcending any employment relationship with the clients.”

But when companies brag about using "independent" compensation experts, they just mean that the consultant is not actually on their payroll. No one thinks these firms are truly impartial and they're hardly public servants, so where’s the conflict of interest? The estimable Charlie Munger, you may recall, compared compensation consultants to prostitutes, so we must ask: If a hooker does chores at a john’s house for extra income, does that undermine the integrity with which she delivers her regular services?

We hope not to spend the weekend contemplating that question. Have a good one.

Frank, Incensed

Go ahead, say the government should do more to control executive compensation. Congratulations: You are officially (a) a liberal extremist, (b) brain-damaged from upside-down yoga positions and too much ginseng tea (a hippie liberal extremist) and (c) an unbeliever when it comes to the benevolent powers guiding the free market (a godless liberal extremist).

If, however, you are Barney Frank, the openly gay liberal Congressman from Massachusetts, you are already all of these and more, so what the heck? Since to your delight you are suddenly the Chairman of the House Financial Services Committee, you can actually make people nervous when you threaten legislative action on excessive compensation.

We are neither shocked nor awed, unfortunately, by Mr. Frank’s liberal extremist proposal. New compensation information in company annual reports, separate and different from proxy disclosures, will just make things more confusing. The bill would institute shareholder approval of a company's overall "compensation plan," but NASDAQ and NYSE companies already get shareholders' OK for equity-based comp plans and it hasn't done any good. We're fond of Mr. Frank's notion that execs who screw up should pay back some of the big bucks, but we’re not sure Congress can use the SEC to make that happen. The Senate's efforts don't seem particularly inspired either.

So the bills need some work, but must we rule out legislative solutions altogether? Wall Street Journal editors and their ilk love to say prior efforts have backfired. Pointing to the 1993 law that used tax deductions to encourage "performance-based" compensation, they conclude that the whole run-up in stock options is - natch - Bill Clinton’s fault. Nicely done, free marketeers: preach the old "performance-based compensation is better for shareholders" gospel, then smack a guy for getting religion.

Yes, legislation doesn’t always accomplish its intended goals. But neither does "the market," a perennial ne’er-do-well when it comes to keeping compensation at reasonable levels. It would be nice if people listened to compensation expert Broc Romanek (probably not the kind of guy who guzzles vast quantities of ginseng tea); he noted the other day that "market forces do not set CEO pay" and tried very patiently to explain to everyone how things work in the real world. But we can’t turn conventional wisdom on its head unless, perhaps, we persuade it to take up yoga.