Sheila Bair

FDIC’s Pay Caps Will Keep Businesses on “Sidelines”

by John Berlau on February 7, 2011 · 1 comment

in Agenda for Congress, Bailout Watch, CEI Projects, Deregulate to Stimulate, Economy, Legal

At 11:30, in a much-anticipated speech at the U.S. Chamber of Commerce, President Obama used Super Bowl analogies to urge American businesses to “get off the sidelines,” “get in the game,” and “invest in America.” But some two hours later, an action by Federal Deposit Insurance Corporation proposing to slash bonuses at financial firms illustrated why so many private-sector players are reluctant to enter a “game” in which the referees change so many of the rules at mid-quarter.

The proposed rules issued by the FDIC would require banks, brokerages, and other financial firms to defer 50 percent of executives’ bonuses for three years. The FDIC, in coordination with other agencies, was given the authority to issue such a rule by Section 956 the of the 2,400-page Dodd-Frank Act that passed last year. But the law doesn’t require this action to be taken. If Obama really wanted to be true to his word about rational regulation, he would tell the FDIC — led by George W. Bush-holdover Sheila Bair — to shelve this rule that micromanages decision that should be made by private companies and their shareholders.

In a free market, it’s up to a company’s owners to decide how to reward those who run it. What is Facebook CEO Mark Zuckerberg worth given the value he has created? That is a hard question; but it is thankfully one government bureaucrats don’t have to decide. The owners of Facebook and every other companies.

The stated purpose of some of the other provisions of Dodd-Frank — such as say-on-pay and “proxy acccess” — is to give shareholders more of a say on how the amount of CEO pay and how it is structured. Whether these provisions actually do this — or whether they simply override state law and empower special interests — is another story.

But here the FDIC as nanny-state entity is overturning the entire justification of shareholder empowerment by dictating terms of a financial executives’ compensation. The argument is that pay practices can encourage “excessive risk taking,” but it simply isn’t borne out in the data that executives made the hazardous bets they did to reap short-term gains.

A study issued by the National Bureau of Economic Research (NBER) from finance professors at the Univeristy of Ohio and the Swiss Federal Institute of Technology found that “banks with higher option compensation and a larger fraction of compensation in cash bonuses for their CEOs did not perform worse during the crisis.” In fact, the study found some evidence these executive performed better than those at banks that had deferred long-term pay plans along the lines the FDIC is now proposing to mandate.

The NBER study and other evidence indicates that bank CEOs were just as caught up in the housing bubble as other players, such as home buyers, the real estate industry, and government-sponsored enterprise Fannie Mae and Freddie Mac — of which all members of the Financial Crisis Inquiry Commission agreed contributed to the crisis, but disagreed on the degree of this contribution.

Many financial executives, like the others, believed that housing would go up in the long haul and many invested accordingly. The authors of the NBER study conclude: “Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis. Consequently, they suffered extremely large wealth losses in the wake of the crisis.”

Regulations on CEO pay are a poor tool to address bank risk-taking. This should be addressed by reserve requirements, leverage rules, and above all reform of deposit insurance to reduce the moral hazard of taxpayer guarantees. The FDIC bonuses threaten to make U.S. financial firms — and the Main Street businesses who depend on financing from these firms — less competitive and put a crimp on job growth.

Government Bullies Retirees, Banks, Rips Off Taxpayers

by Hans Bader on May 15, 2009 · 2 comments

in Bailout Watch, Economy, Legal, Nanny State, Personal Liberty, Politics as Usual

The Obama Administration is now seeking to give the United Auto Workers Union a big chunk of General Motors, at the expense of taxpayers and bondholders (including non-union retirees). If Obama gets his way, the UAW will receive at least ten times as much value ($10 billion plus 39 percent of the company) as the bondholders (who get no money and 10 percent of the company) even though the bondholders are owed more ($27 billion vs. $20 billion). This is neither legal nor fair: under the bankruptcy laws, the UAW is not supposed to get preference over the bondholders; and it is the UAW, not the bondholders, which helped bring GM to its knees through its rigid work rules and excessive wages and benefits. The Administration will seek to get around the bankruptcy laws through a sham sale of GM’s assets to a shell company owned by the Administration and the UAW.

There are retirees — including white-collar, non-union, former GM employees — who depend on their holdings of GM bonds to pay for life’s necessities. Others bought GM bonds to put their kids through college.

The Obama Administration earlier engaged in similar tactics in the Chrysler bankruptcy, fleecing taxpayers, and the secured lenders who loaned the cash-strapped company money, in order to give the UAW union control of Chrysler. Veteran political commentator Michael Barone called it “gangster government.” Law professor and bankruptcy expert Todd Zywicki called it an attack on “the rule of law.”

Earlier, the Treasury Department bullied perfectly-healthy banks into accepting bailout (TARP) money, and then sought to conceal the evidence that it did so, fighting Freedom of Information Act requests.

Among the officials who helped bully the banks was the FDIC’s Sheila Bair. Bair has used banks taken over by the FDIC to engage in politically-correct social engineering, modifying the mortgages of irresponsible borrowers to reduce their payments to just 31 percent of their income — less than many thifty, responsible homeowners currently pay, without difficulty, on their mortgages in high living-cost areas. Deadbeats have had their principal balances reduced, and had their interest rates cut to as low as 3 percent. For that gratuitous waste of taxpayers’ money, she recently received an award from the Leadership Conference on Civil Rights (an ironically-named organization that recently pushed federal legislation to circumvent constitutional protections against double-jeopardy, by allowing innocent people to be tried all over again in federal court).

Sheila Bair’s Coddling of Mortgage Deadbeats Fails, Costing Taxpayers

by Hans Bader on December 10, 2008 · 4 comments

in Bailout Watch, Economy, Politics as Usual

Sheila Bair, the head of the FDIC, has been busy rewarding irresponsibility and punishing thrift by giving special breaks to deadbeat mortgage borrowers from failed banks taken over by the FDIC, like Indymac.

Delinquent borrowers have received reductions in the interest and principal on their mortgages, resulting in interest rates of 3 percent or less, way below the rates available to responsible people who pay their bills on time. Bair’s excuse for this has been that borrowers won’t default if their mortgages are made less onerous. But she’s wrong. Delinquent borrowers who have received new, easier-to-pay mortgages are defaulting in large numbers on the new mortgages, too, at enormous expense to taxpayers.

All the coddling in the world can’t make a deadbeat financially responsible, especially when the deadbeat lives in a State like California that allows a borrower to just walk away from a mortgage without facing any consequences other than the loss of the house (which is no loss at all when the house is worth less than the mortgage).

Sheila Bair should be fired. And federal bank regulators should preempt state no-recourse laws that allow deadbeats at failed banks taken over by the FDIC to just walk away from their loans without any consequences.

Amazingly, Fed Chairman Ben Bernanke, whose “solution” to every problem is a multibillion dollar bailout or “stimulus” plan, has suggested that the federal government sweeten the pot for mortgage deadbeats even further by reducing their mortgage payments from a maximum of 38 percent of their income (under current FDIC standards) to a mere 31 percent of income, less than many people who are current on their mortgages pay.